Six months ago, when Dubai World caused global market upheaval with its debt standstill, few bankers believed they would get their money back. Given the sovereign debt turmoil in the eurozone since, Thursday's $23.5bn debt restructuring announcement by the state-owned conglomerate should have brought sighs of relief.
After all, as trailed in March, Dubai's government will convert about $9bn of claims on Dubai World to equity, and banks will escape a dreaded haircut on $14.4bn of lending. True, maturities were stretched, but Dubai World threw in interest rate and guarantee sweeteners.Yet the agreement, although a step in the right direction, still has to negotiate a major hurdle.
After all, the bank co-ordinating committee, on the hook for almost 60 per cent of Dubai World's debt, needs to rally 66 other creditor banks to achieve the threshold of 66.6 per cent of debt value required for the agreement to work. And some banks resent the sub-commercial interest rates offered on the two-tranche refinancing. The first tranche, a 5-year $4.4bn loan, pays just 1 per cent – far below market rates for Dubai World risk or the 10 per cent paid on property subsidiary Nakheel's debt.