Bank Lending Essentials - Essay Example

Name Tutor Bank Lending Course Institution Date Bank Lending There is need for Dubai World to take advantage during standstill period. A standstill can be viewed as the initial phase of restructuring process and is made voluntarily and often aimed at giving time to the company in order to pursue its survival strategy with a sole view, to formulate a formal restructuring (Zhovner, 2010:30). The concept “standstill agreement” can be applied in different ways or circumstances several in the financial sector. It generally entails or refers to situations in which the companies involved in a negotiation process concur to a momentary stop or halt so that they can provide an appropriate environment for looking a solution. This phase involves lender’s commitment to discontinue the collections procedure on a borrower. This can only happen if at all the borrower express interest to engage in some negotiating and working out solution amicably. At this stage, junior lenders are usually mandated to refrain from practicing their exercising their rights as well as remedies according to the credit agreements and respective law for an agreed time (Singer, 2008:207). Another instance of standstill agreement can occur when say two companies or firms decide not to involve with a third party in the negotiation process. For instance, it a firm wants to merge with another, both firms may demonstrate their intention to pursue other alternatives with other companies for some period. In this situation, it is possible to have ample room for negotiations, while avoiding unwarranted situations in which the other party may have a lot of pressure to act fast or otherwise lose the deal. A Standstill agreement may have various advantages. One of its benefits is that it can control the various distortions associated with lending procedures. In most cases, official lending often interrupts incentives of parties, debtors and creditors where by they may be forced to adopt riskier policies with expectations that lending would cushion them against any consequential crisis (Roubini and Setse, 2004:213). Standstill may also enhance or preserve relationship between the two parties, borrowers and lenders. In the first instance, collateral agreement can offer the borrower ample time to take the necessary actions in addressing its outstanding obligations including financial challenges (Singer, 2008:207). Again, mutual relationship can be enhanced when the lender agree not make any further collection efforts on an unpaid loan since this can prevent the borrower from resettling any outstanding debt. The two may agree on new credit conditions or terms including among others affordable interest rate as well as rescheduling of payment terms. This is often carried out in line with foreclosure action, in which the lender may decide to sell at auction any loan collateral pledged by the other party, the borrower. Loans in this stage of negotiations already are covered fully by loan loss reserves and have been written off as bad debt. Also by discussing new terms and conditions, the lender expects to collect a relatively more from recoveries process than from legal remedies like bankruptcy or even foreclosure. In addition, at standstill agreement, all parties can have an additional time to analyse their procedural options as well as substantive positions when they might otherwise be engaged in a race to the courthouse. Data are needed to assess the relative dimension of the corporate debt problem (in absolute terms and relative to household debt problems) and the implications for creditors, in particular bank balance sheets. Information on credit quality and distribution of debt (by type of contract, borrower, and financial institution) needs to be analyzed and the impact of provisioning on the profitability and capitalization of individual banks. Experience demonstrates that obtaining reliable data relevant for a debt diagnosis can be a challenge. In any case, the temptation to make policy prescriptions in the absence of data supporting diagnosis of the problem should be resisted (Laryea, 2010:13). The period of standstill may also prevent costly litigation that is unnecessary if the defence of the underlying action is successful or if the borrower and lender agree to settle their dispute by pursing other options of conflict resolution. Apart from the financial cost involved, this process may also impact on the timing of the settlement. Again the company’s information is often revealed in the course of the process. Apart from taking advantage of standstill period to solve its problem, Dubai World could discuss with creditors a restructuring that would pare liabilities, which comprise of about $20 billion of loans and bonds accrued from a period of 18 months. If the lenders don't agree then Dubai World may fail to settle its outstanding debt as they matured, which is considered virtually impossible under its current situation. The other alternative which includes assistance from Abu Dhabi should be done on agreeable terms. It appear that Abu Dhabi possess some financial capabilities to assist Dubai world which amount to approximately $500bn from its assets (Eco Flash, 2009, Par 5). Abu Dhabi is the main capital of all the seven states within UAE federation and is one of the third world largest oil exporters. Dubai World should also consider the deal reached with other banks to restructures some of its debt which would reduce the total outstanding loan to some manageable degree. Unfortunately this deal must also be approved by bans which were not initially involved in the negotiation process. One of the terms of restructuring May involved conversion of government debt into equity to assist Dubai World. This restructuring option through loans from Abu Dhabi could also have some significant outcomes or effects on the United Arabs Emirates though this can be taken care of by the possibility of the increased assistance to various banking sectors from Abu Dhabi as well as federal entities. These are generally short terms options or measures aimed at assisting in counteracting the adverse effects of the financial crisis and associated activities on UAE economic growth. On the same vein, Abu Dhabi’s high fiscal spending by would also go along way in facilitating the recovery process, integration as well as economic growth (Reinikka, 2010:297). Under the prevailing circumstances Dubai world could also consider selling their properties to Abu Dhabi particularly the Emirates Airline which is considered one of the fastest growing carriers. Emirates Airline is owned by the Investment Corporation of Dubai, which is in turn controlled by the Dubai government. Dubai world has no option but to sell it to its sister state, Abu Dhabi which may also looking forwards for some concessions from the emirate in return for providing the much needed financial solution to her prevailing problem. Alternatively, Dubai could also take the option of trade with Iran while closely monitoring the future of Emirates Airline. Dubai could also reconsider restructuring its real estate sector. This can be based on the ground that it is currently experiencing a marked reduction in population. It is also clear that the real estate investment is not doing so well, the demand is quite low a big blow to the government since the real estate was generating more jobs compared to other sectors. More so, scholars have found no significant association the monetary and real sector growth rates in the Dubai and the entire United Arabs Emirates’. In fact it is considered one of the sectors that crashed the economic growth (Zubair, 2010:50). A more workable alternative is paramount in so far as the real estate is concerned. In the current financial crisis, Dubai need to sell some of its excess real estates if not all and this could assist the country a great deal in settling its outstanding debt. It is at the moment a good place for renting offices at affordable prices and which would offer great opportunities to foreign investors who have no officers in Dubai. Dubai also needs to embark in programs that would encourage long term investment by the foreing companies as opposed to the short term which is not beneficial. There is also the need to venture in other potential areas while also increasing efforts and resources in those sectors currently doing well. A case in point is the tourism sector which registered a remarkable growth in the recent past. Another option available is emergency measures which including short selling restrictions (Gruenewald et al, 2010). In analyzing Dubai’s financial crisis, it is clear that in one way or another, International rating agencies have a played some role in worsening the situation. The case of the USA association with Abu Dhabi as well as Washington exerting pressure on Dubai to join the 'international community in a bid to taking a more tougher line on Iran, one of key trading partners in the region. Although Dubai enacting insolvency law on the US-British fashion to protect it against local companies like the World from its creditors, more still need to be done. There is an urgent need to implement regulatory mechanisms which is currently being encouraged globally during the current world meltdown (Zubair, 2010: 47). Alternatively, Dubai world could take the option of settlement companies and there after even develop some mutual relationship in the course of their transaction and can come to a settlement agreement quicker and at a more favorable rate compared to the other option of acting on their own. From a general perspective, there is need for financial institutions to adopt diversification which would be very relevant and vital as they advance from the current short-term commercial financing towards long-term investment institutions. In summing up, it is clear that although UAE has exhibited a significant stable on the politico-economic with a remarkable high economic growth, its Dubai segment has had her share of adversaries. Its current financial crisis can be regarded as the worst of its kind in the nations History. It recover will be determined by its commitment to adopting appropriate policies that would save it from the crisis. Only the federal government in Abu Dhabi, while remaining censorious of the excesses in its sister Emirate of Dubai, can prevent Dubai World from becoming the Lehman Brothers of emerging markets. The government of Abu Dhabi has agreed to fund $10bn to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World”. On the other hand, the Standard Chartered will have to work hand in hand with Dubai World so that the perfect result can be achieved in getting the loan back. Although the USS 10 billion bailout only gave Dubai some ease in its financial crisis, it long debt is a serious issue. It is only hoped that the deal reached restructure with approximately USS 23.5 billion in debt with the key lenders with a repayment period over a five to eight years would allow the lenders consider other alternatives backed by various sectors in the country; this remains the best alternative with regard to the prevailing conditions.(ibid: 51). Reference Eco Flash (2009) Focus on Dubai World debt issue, BNP Paribas, Economic Research Department 27 November 2009 09 George H. Singer (2008) The Lender’s Guide to Second-Lien Financing 119-223 Gruenewald, Seraina N., Wagner, Alexander F. and Weber, Rolf (2010) Emergency Short Selling Restrictions in the Course of the financial crisis June 22, 2010. Available at SSRN: http://ssrn.com/abstract=1441236 or http://dx.doi.org/10.2139/ssrn.1441236 Hasan, Zubair (2010): Dubai financial crisis: causes, bailout and after - a case study. Published in: Journal of Islamic Banking & Finance, Vol. 27, and No. 3 (September 2010): .47-55. Nikolay S. Zhovner (2010), Standstill Agreements: Ukrainian Aspects The Ukrainian Journal of Business Law, March 2010 page30-31 Nouriel Roubini and Brad Setser (2004) Bailouts or bail-ins?: responding to financial crises in emerging economies , Washington, USA:Institute for International Economic Ritva Reinikka (2010) The Financial Crisis, Recovery, and Long-Term Growth in the Middle East and North Africa The Day after Tomorrow page 377-386 (online)http://siteresources.worldbank.org/EXTPREMNET/Resources/C22TDAT_377-386.pdf Thomas Laryea (2010) Approaches to Corporate Debt Restructuring in the Wake of Financial Crises International Monetary Fund Legal Department January 26, 2010 SPN/10/02 Read More