Dubai will recapitalise its Dubai World conglomerate and repay property unit Nakheel's bonds in full, with $9.5 billion of aid for a debt deal promising creditors all their money back in up to eight years.

The price of bonds issued by Nakheel, which built a map of the world archipelago, soared and the cost of insuring Dubai debt against default plummeted, while the Dubai main stock index rose 4.73 percent to an 11-week high.

The long-awaited plan unveiled on Thursday is Dubai's attempt to restructure some $26 billion in debt held by Dubai World, owner of the QE2 liner and Cirque du Soleil assets, which fell on hard times when Dubai's property boom went bust.   

The Dubai government said $5.7 billion in funds from a previous loan made by neighbouring emirate Abu Dhabi would provide the lion's share of the overall $9.5 billion, and that it would add around $4 billion of its own resources. Analysts had expected Abu Dhabi to step in with more cash, but that was not part of the package.

"There is no new money from Abu Dhabi," said a government official on a conference call.   

Dubai World put a price tag on the total amount of debt held by creditors outside the government's rescue vehicle, the Dubai Financial Support Fund, at $14.2 billion at the end of December.

The government said those creditors would receive 100 percent principal repayment via new debt with five and eight-year maturities. "The fact that we are still talking only of extension rather than a haircut is highly positive," said Luis Costa, director for emerging markets debt strategy at Citigroup in London.

"This is probably the best outcome that could have come out, but some of the details are vague," said Robert McKinnon, chief investment officer, Asas Capital. "It says Nakheel will renegotiate at commercial rates, but without a guarantee from Dubai World or the government, these commercial rates would be pretty high."         

The Nakheel bond payback offer came as a surprise, as does the absence of a more visible role by wealthy neighbour Abu Dhabi, which has already pledged $10 billion in aid to debt-struck Dubai. The UAE central bank took up $10 billion of Dubai debt in February 2009, as part of sovereign bond programme by the Dubai government.   

The government said the Nakheel bond repayment depended on creditors accepting the proposal. "The proposal is a lot more positive than everyone anticipated," said Nish Popat, head of fixed income at ING Investment Management, adding that it showed "the commitment of the Dubai government".   

"We should see a tremendous tightening of spreads for Dubai-related entities today," he said.

Dubai World said last year it would delay repaying $26 billion in debt linked mainly to property units Nakheel and Limitless World.   

The government said it was also offering to recapitalise Dubai World through the equitisation of the conglomerate's $8.9 billion debt to the government and with up to $1.5 billion in new funds.

Turning to Nakheel, the government said it would inject $8 billion in new funds and that it would equitise $1.2 billion of the government's claim, effectively taking full ownership of Nakheel from Dubai World.   

Bank creditors will be asked to restructure their debt at commercial rates, the government said. Trade creditors would be offered a significant cash payment and a tradable security, the statement said.

"Assuming sufficient support for the proposal, the 2010 and 2011 Nakheel Sukuk will be paid as they fall due," the statement said.   

Core creditors representing 97 banks met on Wednesday to finalise months of talks on how Dubai World can restructure the debt, about a quarter of Dubai's estimated total debt of $101 billion.

Dubai World, which also owns Barneys department stores, is negotiating with a seven-member committee representing the 97 creditors.   

The panel is made up of Standard Chartered, HSBC, Lloyds, Royal Bank of Scotland, Emirates NBD and Abu Dhabi Commercial Bank, which are believed to have two-thirds of the total exposure.

A seventh lender, Bank of Tokyo-Mitsubishi, a unit of Mitsubishi UFJ Financial Group, joined the panel this year.

Dubai World's debt woes have weighed on the local banking sector. Moody's estimated total UAE banks' exposure to be around $15 billion. - Reuters