Drydocks restructures using untested law
Kept afloat: a worker prepares pipes for a rig under construction at Dubai Drydocks World
If Dubai’s 2009 debt crisis was an earthquake that shook the emirate’s economic foundations, Drydocks World’s filing for insolvency protection this week was a mere aftershock.
Global markets have become used to the government and its related entities struggling to pay back the $110bn in debts they accrued in the boom days and spent with mixed results.
But the ship overhaul company’s use of bespoke insolvency legislation at the Dubai World Tribunal nonetheless marks an historic turning point for the emirate. The untested procedure is designed to protect the Dubai World unit from legal action by overseas creditors and push through a $2.2bn restructuring plan.
Drydocks filed for insolvency protection at the Dubai World Tribunal under Decree 57, created in 2009 as a legal framework to restructure Dubai World. It hopes the tribunal will help it enforce its $2.2bn restructuring proposal on a dissenting minority among its 19 financial creditors.
The minority is shrinking. PwC partner Ian Schneider, one of three nominees appointed to oversee the Decree 57 process, says more than 87 per cent of creditors by value have now signed up to the agreement. That figure is expected to rise to more than 94 per cent within a week.
Earlier this week, the company filed for similar protection under a scheme of arrangement in Singapore, where it based its ill-fated south-east Asian business. Its advisers admit the unit’s assets were overpriced on acquisition, and have performed poorly since the financial crisis.
Hold-out creditors, including hedge fund Monarch Alternative Capital, now face the prospect of being “crammed down” into accepting the restructuring proposal by early July, says legal adviser Mark Hyde, of Clifford Chance.
Advisers believe the hedge fund, which was unavailable for comment, hopes to be paid back at par in an attempt by Drydocks to remove objections to a consensual restructuring agreement.
Hedge funds are believed to have bought chunks of the company’s debt at prices as low as 25 cents on the dollar, as banks sold off the debt during the lengthy negotiations between the company and its creditors.
Creditors and shareholders will vote on the plan at a meeting in late May, with the company only needing to secure two-thirds approval to implement the restructuring proposal, which was first outlined in a March meeting in Dubai.
The plan includes a provision of at least partial sale of the company’s shipyards in Singapore and Indonesia, which would allow cash to flow back to creditors, advisers say.
Khamis Juma Buamim, Drydocks chairman, says he is already in discussions with potential joint venture partners regarding the assets. The company, which has cash reserves of $318m, will emerge from the process with a sustainable debt load, he adds.
“We are posted for growth,” he says, arguing that the company is cutting losses across its south-east Asian operations.
According to people familiar with the plan, the $2.2bn debt will be redistributed across the Drydocks entities, leaving the holding company in Dubai with no more than $800m.
In the meantime, banks could receive participation notes on new debt instruments, allowing them to avoid writing down the debts as non-performing loans.
Creditors concede that the restructuring deal may allow them to avoid an immediate economic loss, or haircut, at the time of signing. But they do not expect a part-sale of the Asian operations to allow their principal to be repaid over time.
“It’s about time this happened,” said one senior banker. “But most options seem to make it unlikely that the creditors will get their cash back.”
Drydocks advisers say the banks understand that the value of their debt no longer tallies with the economic reality of the company, implying a realisation that they cannot expect to get all their money back.
“Lenders realise that loan was a mistake, and in a situation where the debt does not equate to 100 cents in the dollar, you might as well recognise that in terms of economic restructuring,” said Clifford Chance’s Mr Hyde.
The backdrop to the restructuring is the government’s refusal to extend financial support as it did during the more high-profile Dubai World restructuring. In reaching an agreement on $25bn of debt, the government included billions of dollars of financial support and state guarantees, as part of a complicated package that won unanimous backing from creditors.
Mr Buamim says Drydocks never asked for government support “because it does not need any”.
But government officials, mindful of $10bn in debt maturing this year, are conserving the emirate’s limited cash reserves to give them some flexibility when refinancing $4bn in maturing bonds.
The Dubai International Financial Centre’s imminent $1.25bn sukuk maturity could be particularly in need of state support, analysts say.