By David French
DUBAI, Feb 22 (Reuters) – More than two years after the Dubai debt crisis erupted, the restructuring of corporate debts remains in legal limbo as it is unclear how banks can get back their money from government-linked enterprises in the Gulf state.
The impasse, which is aggravated by deficient bankruptcy legislation, is finally pushing some banks to lose patience and consider legal action. But their tougher stance is being matched by a hardening of the governmentâ€™s attitude to bailing out state-linked entities, raising the risk of further delays in completing these restructurings.
In other jurisdictions, the spectre of legal action would have loomed long before now.
Local and international banks have been waiting nearly two years in some cases for resolutions to drawn-out restructurings of entities hit by the debt crisis in 2009, when Dubai was forced to request a standstill on flagship conglomerate Dubai Worldâ€™s $25 billion pile of debt.
While Dubai World reached agreement on a debt restructuring a year ago, a string of other state-linked entities have not, leaving banks unable to get back money they are owed. As well as being hampered by a lack of legal remedies to force the issue, banks are also undermined by the fact that potential plaintiffs are companies ultimately owned by the emirateâ€™s ruling family.
â€œYouâ€™ve got to get a Dubai judge to sign off on anything you bring, and itâ€™s never going to happen as the owner is the heir apparent,â€ said one Dubai-based banker, talking about potential legal action by banks against Zabeel Investments, the investment vehicle of the Crown Prince of Dubai.
Talks on restructuring 6 billion dirhams ($1.63 billion) of Zabeelâ€™s liabilities have ground to a halt with multiple loans in limbo and few assets available for sale, leaving banks facing steep reductions in the loan principal they are likely to recover, sources told Reuters in January.
Banks have sent multiple notices demanding repayment, but no legal action has been taken as it is not known whether such a step would succeed in a Dubai court.
The governmentâ€™s hardening attitude to providing financial support is further complicating the situation for banks.
Banks involved in a $10 billion restructuring of Dubai Group, in which banks are owed $6 billion, said in December they were considering legal action to secure their dues from the company, which had not paid interest on its debt pile since August 2010, sources told Reuters in November.
This month the government walked away from talks on the Dubai Group restructuring, dashing hopes of a state-backed rescue. Dubai Group is a unit of Dubai Holding, the personal investment vehicle of the ruler of Dubai.
Analysts say the government has been emboldened in its negotiations with creditors following a number of successful debt repayments, including one for a $3.5 billion sukuk issued by state-owned developer Nakheel, and by Europeâ€™s sovereign debt crisis, which has made Dubaiâ€™s difficulties in paying back debt seem minor by comparison.
The reduction of well over 50 percent which banks will be forced to swallow on their Greek bond holdings, as part of the euro zoneâ€™s rescue plan for Greece, is far worse than anything seen on a Dubai restructuring. Dubai World promised to fully repay $14.7 billion it owed banks, but over a longer period of time and at a lower interest rate.
â€œTo be honest, when the Dubai World restructuring news came out, I was thinking and, perhaps even hoping , they (Dubai World) would drive quite a bargain to reach a more sustainable capital structure. But they chose to go the other way,â€ said Jean-Michel Saliba, economist at BofA Merrill Lynch Global Research.
Banks involved in the Dubai Group restructuring have argued that the government should provide financial support because the documentation promised it. However, they are not in a good position to enforce the claim.
MAY ORDER, WONâ€™T ORDER
While the United Arab Emirates has bankruptcy legislation, the statute has never been tested by the kind of multi-billion dollar, multi-jurisdictional case which a Dubai government-related entity would represent.
Lawyers and bankers complain the legislation is out-of-date – especially in terms of criminalising anyone who defaults on debt – and is open to a judgeâ€™s interpretation, which means two identical cases could yield vastly different rulings. Also, bankruptcy legislation is spread across several different laws.
The authorities have recognised its limitations and a new insolvency law is being drafted, according to James Farn, a partner at Hadef & Partners, which along with Clifford Chance is drawing up the legislation.
â€œIt attempts to bring in best practice from insolvency regimes in a number of other major legal jurisdictions,â€ Farn said.
However, the new law wonâ€™t be in place in time for the current wave of restructurings.
In the 2011 World Bank Ease of Doing Business report, the UAE was ranked 33rd overall globally, but came 134th on enforcing contracts and 151st on resolving insolvencies.
The current insolvency legislation is weighted towards creditors driving a court process to get their cash back, according to Farn. And the process is uncertain.
â€œOne thing that a creditor wants to avoid is to enter into a procedure which may take ages and ages to finish and which may involve spending a lot of money in order to get your money back,â€ he said.
The new bankruptcy law may ease debt restructurings with greater provision for out-of-court negotiations between parties. In addition, the availability of â€œcram-downâ€ provisions – where a minority of creditors can be forced to accept a restructuring agreement if it is acceptable to the majority – should prevent debtors from being held hostage by a few unruly creditors.
But it will still be difficult to seize assets – even if they are pledged as collateral – since land ownership in the UAE is on the whole restricted to citizens, with some provisions for nationals of other countries in the Gulf Cooperation Council.
So international banks involved in a state-linked corporate restructuring would not be able to take control of assets and sell them on to realise their dues, as would happen in the West.
And the new law contains the same potential flaw as the existing legislation: it requires a UAE judge to rule against a government-owned entity – something which appears unlikely.
While Farn would not be drawn on whether a court would sanction anyone at a government-owned commercial entity which got into debt difficulties, he acknowledged that a court might be slightly wary of acting against such companies.
â€œThe new draft law says the court may order, it doesnâ€™t say the court shall order,â€ Farn said.
Banks for their part are wary of upsetting the authorities. That is making them cautious as they start to consider legal action in restructurings, since they do not want to damage future business opportunities.
â€œThe banks are very aware of the ownership of the company and the prominence of the name, its importance to Dubai,â€ the Dubai-based banker said of the Dubai Group negotiations.
â€œThe banks donâ€™t want the negative publicity of legal action and insolvency for a company of this profile.â€
(Editing by Susan Fenton)