By Alessandro Pasetti
The story of Dubai World – the ultimate owner of port operator DP World – could have ended badly when the credit crunch roiled global markets in 2008, had the state-run holding company not received the backing of its bankers, who agreed a $24.9 billion debt restructuring a couple of years later. At that time, a raft of Dubai-owned entities were on the brink of collapse, as were its banks.
Western lenders were among the most exposed, through their global networks, and had to entertain frantic negotiations with borrowers that owed them billions – obligations that were more likely to default than be repaid.
Surprisingly perhaps, the restructuring of Dubai World and DP World took separate paths, but this was because the holding company always needed its subsidiary more than DP World needed its parent, a rather unusual scenario in the corporate finance world.
In short, it’s my view that DP World would be better off foregoing all ties with its parent.
The port operator was excluded from debt negotiations since the early days of the Great Crisis, arguably due to the more difficult financial situation of Dubai World than its own.
Fast-forward to today, and the net leverage of DP World fell to 2.9x in the first half of 2016 from 3.2x at the end of 2015 – which is acceptable, given a gross cash position of almost $1.3 billion and solid cash flows, as well as a decent free cash flow yield spurred by high operating margins of about 35 per cent.
Yet will the current market turmoil, and possible losses related to serving container ship lines, render debt repayments heavier?
Luckily, its debt maturity profile is sound, as the chart above shows, and although the likely default by Hanjin Shipping carries hidden risks, it should be manageable.
DP World was recently reported to have raised cargo handling fees for Hanjin customers at Jebel Ali Port – a necessary move in a year during which it had already enjoyed a few wins on a global scale, including the $1 billion project to develop and operate a new container facility in Ecuador and a 30-year concession for the development of a multipurpose port project at Berbera, in the Republic of Somaliland.
Any meaningful operational achievement, however, might not contribute to value creation until the structure of Dubai World is addressed, even though Dubai World itself can hardly afford to part ways with such a precious cash cow.
Still, at a time when Drewry argues that terminal operators face a perfect storm, it is also relatively easy to make the case that DP World could withstand contagion risk from the likely bankruptcy of Hanjin Shipping – combined with depressed volumes – as a standalone entity, while the interests of shareholders would be better served without the influence of its parent company.
After all, institutional investors already have to perform some proper due diligence to understand how certain DP World deals are crafted, although the appealing maturity/pricing mix on offer often determines a strong response from investors. A case in point is the $1.2 billion Sukuk financing it secured earlier this year, and whose structure is shown in the chart on the next page.
Dubai World’s complex corporate tree and recent corporate events show the extent of the problem.
DP World is owned by Dubai World subsidiary Port & Free Zone World, which originally held 100 per cent of the “company’s issued and outstanding share capital”, but spun off the business in an initial public offering “of 19.55 per cent of its share capital to the public”. As a result, “the company was listed on the Nasdaq Dubai from 26 November 2007” as the credit crunch began to gather steam. “The company (DP World) was further admitted to trade on the London Stock Exchange with effect from 1 June 2011, and voluntarily delisted from the LSE on 21 January 2015,” one reason being that its shares were not liquid enough to attract new shareholders.
The problem goes to the heart of Dubai World’s widespread portfolio of assets, which also comprises Drydocks World and Istithmar World, among others.
In March 2015, Port & Free Zone World secured a $1.2 billion syndicated loan that gave it more funding options, essentially proving that DP World is at the mercy of the decisions being made by its owners. On top of that, in late 2014 news broke that DP World had acquired Economic Zones World – which owns the hugely successful logistics hub Jebel Ali Free Zone – for $2.6 billion from its parent company, in a deal that was not a bargain for the buyer but fully valued the assets of the cash-strapped seller, and which argued that a divestment to any other suitor would have been “seen as a strategic risk for DP World”.
By the end of 2016, DP World is expected to have generated over $900 million of net income, and some $2 billion of EBITDA on almost $4.3 billion of sales. Its interim results indicate that those targets ought to be achieved, but nonetheless organic growth is hard to come by. In the six months ended 30 June, like-for-like trends were not dissimilar from those of 2015, yet it is likely that structural issues in the chain of control could continue to jeopardize DP World’s operating performance and its equity valuation.
The hurdle, of course, is that Dubai World is unlikely to relinquish full control of DP World until it has options at its disposal.
In the aftermath of the 2008 crisis, the government of Abu Dhabi bailed out Dubai and, as a result, fears subdued but didn’t fade completely until early 2015, when Dubai World wrapped up another restructuring of $14.9 billion, although the number of supportive, friendly bankers seemed to have diminished in this second round as bankers themselves have their headaches – new capital requirements, surging regionalization of banking services and structurally higher provisions for many years to come. Now, with Dubai, its banking system and Dubai World all still in a flux, the group says it “has embarked on a process to streamline the group and its core activities”. “This will allow us to move forward with greater efficiency,” it argues.
Sadly, similar actions could mean more pain for DP World, which remains the last port of call and could be forced to snap up unwanted assets while it tries to further expand its already global reach. As a reminder, until the late 1990s the company was a local port operator, while now it boasts a market cap of $15 billion – yet another reason why equity investors, whose holdings appear to be fully valued at these levels, might want to shy away from the opportunity of joining the Dubai World family.
Reprinted courtesy of The Loadstar (www.theloadstar.co.uk)