As dozens of accountants sift through Dubai World's financial records in a race to determine how best to restructure as much as $22bn in debts, the company appears to be pursuing a new strategy to ensure it can win a deal from creditors before facing any major repayment demands, according to sources close to the company and its banks.

 

It now hopes to convince creditors to agree on how to restructure its debts before an April 30 deadline without necessarily first getting them to sign a standstill agreement on debt. "A standstill is nice to have, but it's not essential," a source close to Dubai World, speaking on the condition of anonymity, told me.

Getting a standstill agreement from creditors has been a key condition of Dubai World's restructuring efforts since Nov. 25, when Dubai 's Government appointed an outside accountant to run the process. A standstill would essentially prevent creditors from declaring Dubai World if it missed a payment while it was still negotiating a restructuring of its debts with creditors.

But with Dubai World's lenders already working closely with the Government-owned company to assess its financial health and the company using Government funds to make sure they receive timely interest payments, the company hopes a standstill agreement might no longer be necessary.

A key question, however, is how Dubai World will meet a $1.2bn loan owed by a property subsidiary, Limitless, that is due March 31. A banker who sits on "It is still being discussed whether the standstill agreement includes Limitless," a member of the coordinating committee representing Dubai World's creditors told my colleague, Uta Harnischfeger, "or whether Limitless itself has to approach the banks or pay back if it can."

Eliminating the insistence on a standstill agreement would remove a significant hurdle in the eventual rehabilitation of one of Dubai 's most important companies. Since it was established in 2006 as a holding company to combine the emirate's lucrative port holdings with one of its most ambitious property developers, Dubai World has evolved into one of Dubai 's largest employers and investors.

Dubai World's latest troubles complicates Dubai 's efforts to recover from the global financial crisis and resolving them is seen as key to restoring investor confidence in the emirate.

"Uncertainty is really investors' greatest fear," Nish Popat, the head of fixed income at ING Investment Management, the asset manager of the Dutch-based bank, told Uta. "We need some sort of clarity, some sort of information on how the discussions are going, what the proposal is, the strategy going forward and what the legal rights are. That clarity will help investors decide whether and when they will want to re-invest in the region."

British banks are owed an estimated $5bn by Dubai World, and the creditors' committee representing Dubai World's lenders in restructuring talks is therefore led by HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered Bank.

"Dubai has to be conscious of the fact that how it resolves its current problems and how it deals with its creditors will mean a great deal to the Dubai brand, its reputation and how it secures investment from overseas in the future," Lord Mandelson, the UK business secretary, warned while in Dubai earlier this week.

The Government's announcement Nov. 25 that Dubai World and its developer Nakheel would seek to delay debt repayments triggered major turmoil in global financial markets already nervous about rising government indebtedness. Those concerns have since created a debt crisis in Greece that has spread to the weaker members of the European Union, raising questions about the very future of the Euro.

At the core of the dispute over Dubai World's debts is the question of whether creditors were justified in treating them as obligations of Dubai World's sole shareholder, the Government.

At the height of the controversy over whether Nakheel would repay bondholders in December, the Government and Dubai World made clear that Dubai did not consider debts of Nakheel and Dubai World obligations of the government. That contradicted long-held assumptions among investors and credit ratings agencies that Dubai World and its subsidiaries enjoyed an implicit Government guarantee.

That they did not sparked a broader reappraisal by ratings agencies of similar implicit guarantees enjoyed by other UAE borrowers, including Dubai Holding and companies owned by the Government of Abu Dhabi. It was the prospect of seeing the ratings of its own companies downgraded, combined with the potential for widespread damage to UAE banks if Nakheel defaulted, that convinced Abu Dhabi of the need to step with its $10bn commitment to Dubai in mid-December.

Abu Dhabi 's aid headed off a potentially messy default by Nakheel and eliminated from Dubai World's restructuring talks Nakheel's bondholders, some of whom had threatened to tangle Dubai World up with legal claims in the UK and the US if they were not repaid.

With the Nakheel bondholders out of the equation, Dubai World's remaining 97 creditors created their creditors' committee and appointed KPMG to represent them.

The committee has assigned accountants from KPMG to work with Deloitte and its debt specialist Aidan Birkett, whom Dubai appointed in November as Dubai World's chief restructuring officer, to untangle the mess at the conglomerate. A similar effort is being conducted by advisers to the Dubai Financial Support Fund.

It is a mammoth undertaking. Dubai World has at least 12 subsidiaries and controls at least 78 other units, all of which combined have at estimated $33bn in debt, part of roughly $56bn in overall liabilities. The company has excluded its port operations and free zones from the restructuring, however, leaving just $22bn of debt up for negotiation.

The group's intricate network of joint ventures and other investment links complicates the efforts to value its assets, a necessary step in determining how much it can repay. So far, accountants have turned up more than 1,000 entities that are in some way affected by Dubai World's restructuring, according to a source close to the Dubai Government.

Until the accountants arrive at a meaningful estimate for the value of Dubai World's assets, it appears that no restructuring plan can be finalised , a banker at one of Dubai World's creditors said.

In the meantime, he said, Dubai World and the creditors' committee have been holding meetings or conference calls at least once a week. That kind of co-operation appears to be behind Dubai World's hopes that it can win a restructuring deal without getting a standstill agreement first.

Efforts to obtain a standstill agreement have run into headwinds from bankers who oppose the Dubai Financial Support Fund's insistence that its loans to Dubai World subordinate their own.

The Fund has already provided roughly $6.5bn in emergency credit to Dubai World, including the latest $4.1bn from Abu Dhabi to pay off Nakheel's sukuk that were due in December.

In a typical debt workout, rescue funds from the government take precedence over a company's existing loans, meaning that if the company did ultimately default and was liquidated, the Government would be  repaid before private creditors.

Dubai World still has a trump card in negotiations with its bankers, though. In December, Dubai established a tribunal specifically for dealing with any disputes over Dubai World's debts. If the company and its creditors reach an impasse, Dubai World submit its restructuring to the tribunal, which under the terms of the decree establishing it, would give it up to 10 months and possibly longer to negotiate with creditors.

"The effect of this decree is that even without a formal standstill agreement, Dubai World companies can invoke the restructuring provisions of the decree," Jawad Ali,a partner at the international law firm of King and Spalding, told Uta.