Managing the nitty-gritty of Dubai World debt

We are getting down to the nitty-gritty of the Dubai debt problem. Tuesday's early-hours announcement effectively created a "good" Dubai World and a "bad" Dubai World. This is a financial model tried and tested around the world during the credit crisis, and for the most part it has been successful in preventing the "toxic" parts of a business from infecting the rest. Now it is up to the group and its growing army of advisers, to get on with the immensely complicated task of limiting the downside on the bad, and maximising the return from the good.

The parts of Dubai World that have been ring-fenced among the good are all asset-rich and financially stable entities. DP World, and Port and Free Zone World, are among the world's most modern and productive trading facilities. Istithmar World and Infinity World have the backing of assets that are, for the most part, operationally productive and collaterally valuable. Another significant point in yesterday's statement was a commitment to adopting a "policy of regular communication" with creditors and investors. Given that much of the international criticism of the past week has focused on the perceived lack of transparency by Dubai World, this is very welcome. We shall see how it works out.

A limit has also been put on Dubai World's financial obligations. The big figure of US$59 billion (Dh216.7bn) given in financial returns last summer has been honed down to $26bn of debt and liabilities at risk. Of course, that is more manageable, but it would surely reassure international markets more if the remainder of Dubai World's indebtedness was explained in greater detail. Some of the balance of $33bn consists of unpaid bills; the rest, we are told, comprises liabilities on land grants from the Government of Dubai. This might be an accounting oblem, but it would clarify the situation immensely if the figure for land grants was made known.

The Dubai Government appears to have the power, at a stroke, to reduce the financial burden on good Dubai World. If that were done, it might help persuade creditors to agree in principle to the good versus bad split. This has to be done before the restructuring proceeds if Dubai World is to avoid a messy and destructive asset-grab by creditors. The creditors are now asking themselves: is it in our interests to work this through with Dubai World?

The answer depends on their own calculations of how much they will get back in a co-operative process as opposed to an asset grab. They are a hard-nosed lot and unconcerned about the emirate's feelings in this respect. The hardest-nosed of all are the holders of the Nakheel sukuk, who now face the imminent possibility that they will get nothing at all on December 14 when the Islamic bond matures. Many of these are local and regional institutions that will be amenable to the persuasions of Dubai World.

But there is a growing number of sukuk holders who are the most awkward and inflexible hard-ball players in global capitalism - the hedge funds, arbitrageurs and "vulture" funds that have sniffed blood at Nakheel and have been buying the sukuk at recent distressed prices in the hope of a quick return. I heard just recently of a British institution that snapped up $60 million of Nakheel sukuk at about 57 cents in the dollar. As things stand, they are looking at a losing bet there, and you can be sure they will not go down without a fight.

The arbitrageurs are bunkered in New York, where there has been much activity on the "grey market" in Nakheel. That is why Dubai World has retained the services of Moelis and Co, with offices on Manhattan's Park Avenue, to play tough with the arbs and vultures. It will not be long before the big Wall Street law firms gate-crash the party. They will predictably take as hard a stance as the law allows, and I would be very surprised if there was not a formal claim to some of the assets of good Dubai World held in the US. Selling the good versus bad split to them will be immensely difficult.

Many western governments helped ease their ailing corporates through the credit crisis by taking some of the toxic liabilities on to their own books as public bailouts. Dubai has steadfastly refused to do that. It is a bold stance, as hard-nosed as the toughest in New York. @Email:fkane@thenational.ae