A shudder went through some financial professionals in the UAE late on Monday night when Abraaj Group announced it was seeking a “standstill agreement” with creditors.
Many in Dubai and Abu Dhabi last heard those words in November 2009, when government-owned investment conglomerate Dubai World said that it was asking creditors for a moratorium on interest and debt repayments while it sorted out its finances.
That standstill request heralded a crisis for the UAE that still has repercussions today. Dubai World had to renegotiate $25 billion of borrowings in a protracted series of negotiations with banks and bondholders. Abu Dhabi had to come to the rescue with a $20 billion loan to its federal partner.
It was all part of the global financial crisis, of course, when busts and bail-outs were the order of the day around the world. And — with Abu Dhabi’s help — Dubai got through it and recovered fairly quickly.
But as anyone who lived through that time in the UAE will remember, it was a close-run thing. Those were the days of “helicopter money” flying between the emirates’ two biggest cities, of 4x4s abandoned at the airport with credit cards glued to the windscreen, and of defaults and imprisonments for bounced checks.
You could argue that the Dubai World crisis permanently affected the financial self-confidence of Dubai. The real-estate market, booming before 2009, has never really recovered, and the IMF’s assessment of the emirate's overall indebtedness has stayed stubbornly at high levels, as debts and other obligations were rolled over by international creditors. The era of “extend and pretend” (when banks would lengthen the term on non-performing loans in the hope that things would eventually get better) began back then, and they’ve been pretending and extending ever since.
Nobody is seriously suggesting the Abraaj affair — it’s still, just, at the “affair” rather than “crisis” stage — is as serious as Dubai World, for three reasons.
There are serious worries about Abraaj, and some tough decisions have to be taken in the next few weeks
Frank Kane
First, the sums involved are smaller, with Abraaj’s last statement of assets under management showing a value of $13.6 billion. This has been reduced by closures and withdrawals, but even if the whole amount had been wiped out, which is very unlikely, it would not rival the impact of Dubai World.
Second, the emirate of Dubai has much less exposure to Abraaj than it did to Dubai World or the other conglomerates that had to reschedule debts after 2009. There are some big government investors, such as the Investment Corporation of Dubai, and some of the best-known businesses in the region — such as Mashreq Bank and the Jafar family of Sharjah — are among the creditors. But Abraaj is not a government-related enterprise like Dubai World.
Finally, the global backdrop to Abraaj is much more benign than in 2009. Dubai World had to negotiate with creditors who were under pressure virtually everywhere in the world, and who were guaranteed to strike the hardest bargain possible. Abraaj, by contrast, is talking to creditors at a time when the global economy and financial system is looking far more robust.
For those reasons, it is unlikely that the Dubai authorities will take action similar to the radical bankruptcy provisions it announced for Dubai World, when the infamous “Decree 57” gave the government the carrot-and-stick weapons, similar to American Chapter 11 provisions, which eventually persuaded creditors to back the restructuring plans.
Nonetheless, there are serious worries about Abraaj, and some tough decisions have to be taken in the next few weeks.
Secured creditors are, by all accounts, close to agreeing the standstill, which will alleviate the pressure on about $1 billion of debts held by the Cayman Islands-based holding company. But that deal, “imminent” on Monday night, was still not finalized yesterday.
The unsecured creditors — which could account for another $400 million of debt — include Kuwait’s Public Institution for Social Security, which has brought liquidation proceedings in the Cayman Islands. Maybe it will be persuaded to throw in its lot with the “standstill” group, but that is not guaranteed.
There is also the progress of talks with Cerberus Capital, the US private-equity group that has been thinking about buying Abraaj’s investment management business. Reports suggesting a low-ball offer price of $125 million might show the renowned Cerberus trading mentality, or they might hint that there is less value in Abraaj than has been assumed.
And what does Arif Naqvi, the Abraaj founder and chairman of the holding company, do now? He owns a big chunk of the equity of the holding company, enough for it to be regarded as a controlling stake, and will have a decisive say on the outcome of the current negotiations. But there is an increasing belief that he will have to let go of his baby if progress is to be made.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai.