Lawsuit threatens $10 billion Dubai Group debt deal

Three banks have begun legal proceedings against an investment vehicle owned by Dubai's ruler in an unprecedented move to secure repayment of loans in the Gulf state that could delay a wider deal on restructuring $10 billion of debt.

Royal Bank of Scotland (RBS.L) said on Thursday it had launched the action against Dubai Group with German lender Commerzbank (CBKG.DE) and South Africa's Standard Bank (SBKJ.J).

The banks began the proceedings in a London court last Thursday, people familiar with the matter said. The move breaks with the precedent in previous restructuring cases involving Dubai state-linked firms which avoided courts due to the United Arab Emirates' untested insolvency regime.

Dubai Group, a unit of Dubai Holding, the investment arm of Sheikh Mohammed bin Rashid al-Maktoum, was hit hard by the global financial crisis in 2008 due to excessive use of leverage in its investments and a sharp decline in asset values.

Since missing interest payments on two loan facilities in 2010, it has been locked in talks with its lenders to extend repayment deadlines. It wants time for asset values to recover before making sales in order to pay back its debts.

Hopes of a deal this year, though, could be jeopardized by the legal action.

"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 one source with knowledge of the situation. (...)