Dubai World halts loan interest payment

Dubai World won’t pay interest on outstanding loans starting this month as the state-owned holding company waits for lenders to agree to the $14.2 billion debt restructuring proposal, two bankers familiar with the plan said.

Interest accrued on the loans as of May 1 will be added to the new rolled-over loans offered to creditors, the bankers said, declining to be identified because the negotiations are yet to be completed. Creditors of Nakheel PJSC, Dubai World’s real-estate unit, will continue to be paid interest, according to a letter by law firm Allen & Overy to Nakheel creditors.

A separate coordination committee of Nakheel’s creditors has also been set up to negotiate with the real-estate company, the letter from the law firm says. A group of seven banks including Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Standard Chartered PLC, is currently negotiating the debt deal with Dubai World on behalf of more than 90 lenders.

Dubai World, one of the emirate’s three main state-owned holding companies, and its property unit Nakheel, are seeking to renegotiate terms on a combined $24.8bn of debt after the global credit crunch battered Dubai’s real-estate market and left the emirate’s companies unable to raise new loans. Dubai World asked its creditors on March 25 to roll over debt into two new five- year and eight-year loans.

A spokesman for Dubai World declined to comment. A spokeswoman for Dubai’s Department of Finance, which has committed $9.5bn to help the restructuring, said discussions with creditors continued to progress constructively and the Department would not comment on the negotiations. An official at Allen & Overy was not able to comment immediately on the content of the letter.

Abu Dhabi’s government lent Dubai $5bn on December 14 to enable Dubai World to pay $4.1bn to settle a Nakheel Islamic bond. The remaining money was to be used to pay interest and working capital until April 30 if banks agreed to the restructuring, Dubai’s government said that day.

Nakheel may pay about Dh3.6bn ($980m) of Islamic bonds due May 13 even if its parent Dubai World doesn’t reach an accord with creditors, a government spokeswoman said last week.

Dubai World’s creditors are being offered below-market interest rates on rolled-over loans while Nakheel’s creditors will be paid interest at commercial rates, according to the proposal. The different terms for the two reflect differences in their level of security and legal positions, a person close to the Dubai government said March 29.

Dubai World offered to pay its creditors an additional 1 per cent interest upon the maturity of rolled-over loans, a banker familiar with the plan said April 29. The 1 per cent rate would be on top of the 1 per cent offered over the life of the loan, he said. Banks are asking for different rates on dirham and dollar loans rather than the uniform 1 percent on all loans, the banker said.

Some banks are reluctant to accept the 1 per cent rate presented on March 25 as it is lower than the market rate of about 5 per cent and would force creditors to book impairment provisions. An interest rate of 2 per cent to 2.5 per cent on the new loans would mean writing down the value of the loan by 20 per cent to 25 per cent, said Murad Ansari, a Riyadh-based analyst at EFG-Hermes April 22.