Dubai rallies as debt deal seen near

State-owned conglomerate Dubai World held talks with its main lenders this week, including Standard Chartered and HSBC , as it finalises a plan to restructure $26 billion (17.3 billion pounds) in debt linked to property units Nakheel and Limitless World.

Signs a deal is imminent grew as Standard Chartered put internal restrictions on trading in Dubai World-related instruments and HSBC was seen following suit.

The National newspaper, citing unnamed sources, said the firm put its first concrete proposals to local banks on Thursday, something a Dubai government spokeswoman later denied.

But speculation about a deal helped push Dubai's index <.DFMGI> to its highest level since January 14 while the cost of insuring Dubai sovereign debt for five years fell 10 basis points from the previous session. Nakheel saw its 2011 bond rise to a two-month high. "People want a resolution so they can start doing some fundamental analysis," said Keith Edwards, head of asset management at Doha-based investment company The First Investor.

"The expectation seems to be for a 20 percent haircut, a 10-year extension and a government guarantee -- if there's anything less than that there could be a correction."

Dubai's proposal may include more than two tranches in an effort to meet the needs of the 97 creditors of Dubai World.

Local banks with little lending power may want whatever they can get from Dubai World quickly, while international lenders with big balance sheets can afford to wait for full repayment.

Two of the restructuring options include repayment over three to five years with the principal discounted, and repayment over seven to nine years with no discount. How much of a "haircut" is included on the shorter-term deal depends on how much money Abu Dhabi stumps up.

Abu Dhabi, the richest and largest in the United Arab Emirates' federation, bailed out Dubai in December and is expected to help again albeit grudgingly as it calculates the financial cost of not aiding its flashier neighbour.