Dubai World, the chronically indebted state-backed conglomerate, yesterday said that it had struck a deal with its lenders to restructure $23.5bn (£16bn) of debt, which it hopes will not only save the company's reputation, but will also help to ease the pressure on the emirates' troubled economy.
The Gulf state, with its ostentatious building projects that attracted film stars and the leading lights of Western finance alike, will hope that the agreement with 60 per cent of Dubai World's lenders will lift the cloud that descended on its economy when the group asked investors for more time to meet a bond repayment.
Dubai World rocked global financial markets last November when it asked lenders for a six-month moratorium on $4bn of debt repayments due a month later. The request came on the eve of Eid al-Fitr, a three-day holiday, leaving lenders in a state of flux.
The company hailed the agreement yesterday, arguing that it would help to repair confidence in the group. "This is an important milestone and reflects our efforts to achieve the best possible solution for all stakeholders," said Aidan Birkett, the company's chief restructuring officer.
"The proposal puts the company on a sound financial footing and reflects the continued support of the government of Dubai and its lenders. It offers the company the ability to maximise the value of its assets over the medium to long term," he said.
The deal still requires the approval of the lenders who were not involved in the negotiations. While analysts welcomed the announcement, they warned that Dubai World still has work to do.
"It's an important step to improve the credit environment here in Dubai and the United Arab Emirates. It's been long-awaited," said Martin Kohlhase, an analyst at ratings agency Moody's. "If core banks have agreed, it doesn't mean that necessarily it's a signed deal yet, but it's a step in the right direction,"
UK banks, among the heaviest lenders to Dubai World, have been locked in talks with the group over the crisis. The taxpayer-backed Royal Bank of Scotland and Lloyds Banking Group, along with the emerging markets-focused Standard Chartered, are part of the group that struck the deal yesterday. None of the UK banks involved in the talks was prepared to comment.
Western banks have long argued that lending vast amounts of money to the Gulf states is justified on the basis that other emirates have a tradition of coming to the aid of those that get into difficulty. In March, this thesis was backed when Dubai's rulers agreed to a $9.5bn bailout package for Dubai World, which was made part of yesterday's agreement.
Last November, a week after the crisis surfaced, the United Arab Emirates central bank also moved to quell fears of contagion by promising to "stand behind" the banks that had lent to Dubai World. That statement was seized upon by leading bankers, who for years have privately said that the country would never allow a default.
Peter Sands, chief executive of Standard Chartered, the bank thought to have the biggest exposure to Dubai, said at the time: "The UAE central bank has acted decisively and pragmatically in announcing new liquidity measures today. We are confident that Dubai, and the UAE as whole, will work through these issues and continue to prosper as a dynamic and vibrant part of the world,"
At the time of the crisis, Dubai World held as much as $59bn of Dubai's $80bn of bonds and loans. UK banks had claims of $50.2bn on debtors in the UAE, out of the country's total debt of $123bn.
Under the terms of yesterday's deal, lenders will choose between three repayment options, depending on their exposure to Dubai World, while the company's debt will be extended, and with the help of the government bailout package, some of the borrowings will be converted into equity.
How did it come to this? The rise and fall of Dubai
The celebrations in January for the opening of the Burj Khalifa, the 828m tall record-breaking skyscraper, could not have come at a worst time for Dubai. As the fireworks were popping the world knew that it was in the economic mire.
The tower, named after the ruler of Abu Dhabi, recognised that Dubai was hoping for financial assistance from its resources-rich neighbour after the state-backed conglomerate Dubai World said that it was not able to meet a $4bn (£2.7m) scheduled debt repayment, a move that sent financial markets into a spin and threatened to undermine confidence in the entire region.
Dubai got rich on attracting foreign contractors and financial institutions, which were encouraged to take advantage of the cheap debt markets and the liberal business rules in the Emirate.
By the time Dubai World said it was unable to meet its repayments, the tiny state had run up debts of $80bn, according to Bank of International Settlements. The money was used to fund numerous projects, from the Burj to the palm islands that housed many of the expats promised tax-free salaries for completing Project Dubai.
But it was only a matter of time until the borrowing caught up with Dubai. The financial crisis vastly inflated debt prices, meaning that Dubai World faced refinancing costs it could not afford.
Backers will be hoping that yesterday's deal gets the backing of all of Dubai World's lenders, but it is doubtful that they will ever allow Dubai to borrow as much again.