Two years after the Dubai debt crisis erupted, contributing to a wave of loan restructurings across the Gulf, those restructurings may be entering a more difficult phase as banks become reluctant to extend maturities further. Government-related and private companies in the region have so far avoided defaults by agreeing with creditors to push out maturities - a process labelled "extend and pretend" by some cynical bankers.
This method has helped banks avoid billions of dollars in writedowns and companies to avoid the shame of defaulting. But some banks may now be reaching the limits of their willingness to accept this strategy. Instead, they may demand that debtors make payments while the banks write down part of the debt, or resort to more radical strategies such as debt-for-equity swaps.
"In recent months, we have started to see the end of the first phase of restructurings where refinancings were largely based on extending and pretending," said David Stark, managing director for restructuring advisory services at consultants Deloitte, which has advised on debt restructurings in Dubai. "We are beginning to see situations where the hoped-for market recovery has not materialised and, as a consequence, more radical restructuring may be required."
The most prominent example of maturity extension is the $25 billion restructuring of state-owned conglomerate Dubai World, which promised full repayment plus interest to 80 creditors in exchange for their agreement on new five- and eight-year financing facilities.
The jury is still out on the success of Dubai World's restructuring. Its plan says there will be asset sales, which could include prized assets such as ports operator DP World, but Dubai has clearly been reluctant to sell off its crown jewels. Some other debt restructuring plans in the region have clearly run into trouble, because they were based on excessive hopes for economic recovery and rebounds in asset prices - the main Dubai stock market index is languishing slightly below the low it hit in 2009.
Kuwait's Global Investment House is an example. Last month the investment firm asked banks to defer debt payments set down under the $1.7 billion restructuring accord which it signed in 2009, and it appointed Evercore Partners to advise it on putting together a new debt plan. It is not yet clear how Global Investment's new deal will work. But a simple extension of maturities may be difficult. One reason is that the eurozone debt crisis has increased pressure on the funding of European banks, some of which are no longer as happy to see their money tied up for long periods.
"We are seeing a toughening stance from European banks, but this is as much due to a recognition that problems in companies here won't be resolved by a short term bounce-back of asset values, and more significant changes need to be made, as it is by the European situation," Stark said.
An international banker, speaking on condition of anonymity because of the sensitivity of the issue, said many banks remained reluctant to write down debts in the Gulf. "You would not believe some of the things I see and hear as the local banks discuss how to deal with their auditors and the central bank to avoid provisions," he said. But banks in the Gulf have been building their capital positions since 2009; United Arab Emirates central bank figures, for example, show average capital adequacy ratios at the country's banks rose from 19.2 percent in December 2009 to 21 percent in June this year. So many lenders are now in a better position to accept write-downs.
"Write-downs will still be avoided if possible this year but as many big regional players are expected to be overcapitalised into 2012/13, bank managements may take the opportunity to take hits they could not afford in 2009 and 2010," said Paul Reynolds, a managing director in debt and equity advisory services at financial consultants Rothschild.
Debt-equity swaps also remain rare, but a 1 billion dinar ($3.6 billion) deal in February this year to restructure the debt of Kuwait's Investment Dar, owner of half of luxury carmaker Aston Martin, may be a model for others. The plan includes giving creditors a 10 percent stake in Investment Dar. However, such deals will only be options for businesses with good enough cashflows to attract banks.
Relations with governments will play a role in banks' decisions on restructurings. Some European and local banks do not want to jeopardise business ties to governments by being too aggressive with state-linked firms - especially, in the case of the European banks, since the sums involved are often minor compared to the billions of euros at stake in the eurozone.
Big state-linked firms have also been able to adopt a "take it or leave it" approach to banks because of their size and, in the case of Dubai World, the use of Decree 57, a bankruptcy law that was introduced by the Dubai authorities to deal with the restructuring of the conglomerate. The lack of precedents for the decree meant banks were reluctant to test it, making them more inclined to a consensual approach. But most of the restructurings now being discussed in the Gulf are of private companies, which do not have such advantages; Decree 57 does not cover them. This leaves them open to tougher terms from the banks.