Investors in Aldar Properties' $1.1bn Islamic bond, which is due November 10, are betting the indebted developer will repay the issue even if it means more aid from Abu Dhabi which bailed the company out this year.
Aldar is limping back to recovery after posting record quarterly losses at the end of 2010, forcing the Abu Dhabi government to step in with a $5.2bn rescue package in January.
The builder of the Yas Marina Formula One circuit in the UAE capital has been forced to cut staff and scale back operations as it grapples with a property collapse in the region.
It has also seen the Abu Dhabi government extend its control over the firm, including replacing its chief financial officer with an executive from state fund Mubadala, which participated in the January bailout.
Despite its troubles, bondholders are betting the developer will pay off the convertible sukuk in full if only because of Abu Dhabi's determination to avoid the embarrassment of a default on its doorstep.
The sukuk was trading just below par on Wednesday, bid at 99.90, one UAE trader said, implying bondholder confidence in the credit.
"There's no doubt about this one. Aldar will pay. If there's a default here, it can trigger others, so they can't afford to miss this one," said Mohamed Yasin, managing director and chief investment officer at CAPM Investment.
Non-payment of a bond from an Abu Dhabi-linked company would damage the government's reputation, and risk higher borrowing costs for its firms.
The sukuk was arranged as an exchangeable bond by National Bank of Abu Dhabi , Barclays Capital and Credit Suisse, at a conversion price of $1.55 or 5.69 dirhams.
Aldar shares ended at 1 dirham on Wednesday on the Abu Dhabi bourse. The stock has tumbled 55 percent this year. The deadline to exchange the bonds into Aldar shares was 25 days prior to the maturity date, according to terms released in February 2007.
Aldar officials were not immediately available for comment.
The company is due to announce third quarter results on Thursday after a board meeting where the upcoming redemption will be discussed, a source familiar with the matter told Reuters.
"As Aldar has always said, it will meet its obligations," a source familiar with the matter told Reuters.
It swung to profit in the second quarter and analysts forecast profit of AED139m in the third quarter, from a loss of AED731m a year ago.
Abu Dhabi, the wealthiest of seven emirates which make up the UAE, holds over 90 percent of the oil reserves in the world's fourth largest exporter.
It threw neighbour Dubai a $10 billion lifeline in 2009 which helped repay a $4bon sukuk to bondholders of its flagship property firm Nakheel.
"From a bondholder perspective, I'm positive on the Aldar credit. As such I don't foresee any issues with redemption of the forthcoming bond maturity, and indeed the market is currently pricing the instrument as such," said Chavan Bhogaita, head of markets strategy unit at National Bank of Abu Dhabi.
The developer has put some projects on hold as it grapples with a sluggish market recovery.
House prices in Abu Dhabi, 60 percent below their peak, may fall further, with about 11,000 new homes expected to hit the market in the fourth quarter, according to a report by property consultants Jones Lang LaSalle.