INTERNATIONAL REPORT—Capital for hotel owners and developers could be choked off even further if Dubai World is unsuccessful in restructuring its massive debt, some industry experts say.
Lenders and representatives of government-controlled Dubai World are currently meeting to discuss modifying some US$26 billion of the company’s total US$60 billion of debt in a process that could take months.
|Trump Hotel and Tower on the Palm Jumeirah
A failure to do so could further delay the flow of capital to hotel owners and developers, said Rich Conti, president of The Plasencia Group, an asset management and consulting company in Tampa, Florida.
“It is important they do a restructuring and that it works out for them and their lenders,” Conti said. “If they can figure out how to get through this and survive from 2010 until 2015, what you’ll end up doing is giving the repaid money back to lenders. Hospitality and real-estate lenders can recirculate that money.”
A Dubai World spokesman, who asked that his name not be used, declined to comment on what affect the company’s restructuring might have on the rest of the sector.
“We are managing the hotels day-to-day,” he said. “I can’t say what the long-term ripple effect is going to be.”
‘It’s going to be pretty tough’
Significant obstacles remain before hotel developers can get their hands on a portion of the debt Dubai World has yet to repay.
David Butter, Middle East director at the Economist Intelligence Unit, has his doubts about whether Dubai World will be able to modify its loans.
Dubai World's hotel assets
Following is a listing of some of Dubai World’s global hotel investments, broken down by division, location, and the amount of the investment that Dubai World has in the property where that information is available from media reports.
These properties were compiled from Dubai World’s Web sites and news stories that mention the company’s holdings. Dubai World, a private company, has declined to provide a comprehensive listing of its hotel properties.
• The Fontainebleau (Miami, US$285 million)
• Palm Deira (Dubai, United Arab Emirates)
• Palm Jebel Ali (Dubai)
• Palm Jumeirah (Dubai, US$12 billion)
• Trump International Tower and Hotel (Dubai, US$789 million)
• Waterfront (Dubai)
• Atlantis The Palm (Bahamas, Dubai)
• W Hotel (Washington, D.C.)
• Knickerbocker (New York City)
• Mandarin Oriental (New York City, US$248.2 million)
• CityCenter (Las Vegas, joint venture with MGM Mirage, US$2.5 billion)
• Arabian Canal (Dubai, US$11 billion)
• Al Wasl (Riyadh, Saudi Arabia, US$12 billion)
• Halong Star (Halong Bay, Vietnam, US$220 million)
Dubai World Africa
• Bilene Hotel and Resort (Mozambique)
• Comoros Luxury Beach Resort (Union of the Comoros)
Dubai Maritime City
• Marina District (Dubai)
“From what we’ve heard so far, it’s going to be pretty tough,” Butter said. “It’s going to take quite a while.”
That could mean problems for those who want to refinance existing properties or develop new hotels, Butter said.
“Any developer looking to refinance existing facilities will have a hard time over the next two to three years, at least,” he said. “And for new facilities, it could be difficult to make much headway” if the debts aren’t paid back, he said.
One of the biggest problems for Dubai World as Butter sees it is the actual amount of money the company is trying to restructure. It is a larger amount than the US$24 billion that he initially expected.
“It’s quite a considerably bigger package of debt than we thought,” he said. “It looks to be quite a complicated process.”
‘A bowl of spaghetti’
Complicated might be understating it. BusinessWeek quoted an unnamed source, who the publication described as being a “top U.S. executive with extensive dealings in the region” as saying: “It's a bowl of spaghetti in terms of their corporate structure. There are so many different companies and companies within companies.”
Even Chris Turner, former director of risk and assessment management at Istithmar World, a division of Dubai World, said the company did not know what its investments were, according to BusinessWeek. He said his team, in spending a year trying to put together a list of Dubai World’s holdings, found some loan documents and sales agreements in an office that had long been empty.
The Dubai World spokesman declined to identify Dubai World’s hotel holdings. “… as a private business, we simply don’t discuss this sort of information publicly,” he wrote in an e-mail.
Adding to the possible complications is the initial rejection by lenders of Dubai World’s proposed “standstill agreement” that would delay payment of the money the company owes.
The spokesman for Dubai World said he is not concerned with the lenders’ denial or the current state of talks between the two sides. He said he has been a part of several loan modification meetings that have gotten off to rocky starts.
“The negotiations have only just started,” he said.
The stakes in these negotiations are large. In a research note earlier this month, Mardig Haladjian, a general manager in the Financial Institutions Group for Moody’s Investors Service, said a default at Dubai World could spread to other companies and industries, and banks especially could be affected in a “profound” way.
Moody’s also has downgraded a half dozen government-related companies because of a perceived lack of support for companies that are not directly part of or guaranteed by the government.
Still, Haladjian and other Moody’s analysts said the effect on banks likely would be mitigated by a government bailout.
Michelle Chang, a hotel industry analyst for Morningstar, believes Dubai World and its creditors will be able to reach an agreement.
“Based on my experience, lenders have been willing to negotiate,” she said.
If Dubai World needs to sell some of its properties, there isn’t likely to be a shortage of potential buyers, said Will Marks, managing director at investment bank JMP Securities.
“There’re still plenty of individuals who would like a chance to buy some of Dubai World’s assets at distressed prices,” Marks said. “So a fire sale of some of those properties would be interesting.”
According to some media reports, Dubai World might sell off some of its assets in order to repay the debt, but it’s unclear if that would include any hotel properties.
Dubai World is apparently trying to keep some of its properties. Istithmar, the company’s private equity division, lost out in a foreclosure auction for the W Hotel Union Square in New York. The 270-room property was acquired by private equity fund LEM Mezzanine, which is affiliated with Lubert-Adler Real Estate Funds.
Istithmar had bid US$2.1 million for the hotel, but LEM was awarded the property after a closed-door meeting, according to The Wall Street Journal.
Selling the assets isn’t likely to make much of a dent in Dubai World’s debt, Butter said.
“The market is not that strong,” he said. “They might have to take paper losses.”
Mike Cahill, president and founder of HREC Investment Advisors in Denver, Colorado, said all the debate swirling around Dubai World goes to show how connected global economies are.
“Capital markets are not just domestic, they’re international,” he said. “An impact in one country carries to another, then another and another.”