Royal Bank of Scotland (RBS) and two other banks have begun legal proceedings against an investment vehicle owned by Dubai's ruler, an unprecedented move to secure repayment after two years of unsuccessful debt talks.
RBS, along with German lender Commerzbank and South Africa's Standard Bank, had threatened legal action after walking away from negotiations over Dubai Group's US$10bil debt pile, sources said in July.
The banks began legal proceedings in a London court on Sept 6, breaking with the precedent in previous restructuring cases involving Dubai state-linked entities because of the opaque and untested insolvency system in the United Arab Emirates (UAE).
Given the complexities of the case, in particular the lack of precedent, the London filing threatens to extend debt talks well into the future, having dragged on since Dubai Group missed interest payments on two facilities in late 2010.
“Arbitration could be two years and we don't want to see the destruction of shareholder value just because these banks have thrown their toys in the corner,” said a source.
In a statement, RBS said it was forced to take action after several concessions offered to the group failed to secure a solution.
“We do, however, want to make clear that our preference was always to conclude an agreement without formal legal proceedings and we therefore remain open to such an outcome if an acceptable commercial resolution is forthcoming,” it said.
Such sentiment adds fuel to the belief that the legal action is more likely a negotiating tactic on behalf of the three banks all of which are unsecured creditors to secure a better deal from Dubai Group.
“They are unsecured and have nothing so they are doing it out of desperation or because they expect the Dubai government will bail out the group,” said one UAE-based banker.
The government walked away from debt talks in January, dashing any hope creditors had of state support.
Dubai Group, a unit of Dubai Holding which is the investment arm of Sheikh Mohammed bin Rashid al-Maktoum, was hard hit by the global financial crisis in 2008 due to excessive use of leverage in its investments and a sharp decline in the value of its portfolio companies.
Like a number of other state-linked entities in the emirate, it embarked on talks with creditors to restructure debt and extend maturities.
The London filing comes at a time when others on the restructuring are considering a proposal, put to the group before the summer, which would see all lenders extend their obligations to allow for Dubai Group's asset values to recover before they are sold.
Debt extensions range from 3 years for secured creditors up to 12 years for unsecured creditors. The sheer length of time is the main concern for the three banks because of the cost it would impose on unsecured lenders to extend cash for so long.
“Over 35 banks are working towards an agreement and a global term sheet is now being considered by bank credit committees, a number of which have indicated their support,” Dubai Group said in a separate statement. “We believe that we can reach a consensual agreement with our creditors.” - Reuters