Nakheel may need state pledge to raise new debt

Nakheel, the Dubai developer that wrote down $21bn of its assets, may struggle to raise debt without a state pledge to back its first fundraising since the emirate’s property crash, analysts say.

The builder of islands shaped like palm fronds off Dubai’s coast is in talks with banks to raise at least AED300m ($82m) for a retail project on Palm Jumeirah, chairman Ali Rashed Lootah told reporters on Wednesday.

This is both Nakheel’s first project and attempt to sell debt since a 2009 restructuring.

“Any issue would have to be at a very competitive yield and probably with a structure that gives some government guarantee,” said Ahmed Talhaoui, the Abu Dhabi-based head of investment and asset management at Royal Capital.

“Nakheel used to be distressed and it’s in a segment of the market which is also distressed.”

The UAE property sector is still fragile after residential real-estate prices in Dubai slumped more than 60 percent from a mid-2008 peak as banks curtailed mortgage lending and speculative buyers fled the market.

Developers cut hundreds of jobs and put projects on hold. Nakheel escaped default with the help of an $8.6bn bailout from the Dubai government.

The yield on Nakheel’s AED3.8bn, 10 percent sukuk maturing in June 2016 has fallen 57 basis points, or 0.57 of a percentage point, so far this year to 18.01 percent, according to data compiled by Bloomberg.

Nakheel is seeking to increase rental income with its new retail project, to include a walk, shops, restaurants and computerized fountains situated at the tip of the Palm Jumeirah, Lootah said yesterday.

Should Nakheel issue bonds to finance the venture, it “would be a tough sell even to local banks,” said Serge Lioutyi, emerging market credit sector specialist at Citigroup Global Markets.

“They are already full up on real-estate risk and Nakheel risk, and they provisioned for this not too long ago. I can’t imagine they would want to take more risk.”

Dubai World, Nakheel’s former owner, roiled global markets in November 2009 by seeking a “standstill” from creditors to give it time to restructure about $25bn of debt, just three weeks before the maturity of Nakheel’s $3.52bn Islamic bond.

Abu Dhabi extended a $10bn bailout to help Dubai World meet its obligations and last March, Nakheel reached a restructuring agreement with creditors.

“Most people think Nakheel won’t be able to pay off its existing debt without government help,” Lioutyi said. “The outlook for Dubai is improving, but when lenders look at corporates now, they want to make sure that they can survive on its own two feet without any government support.”

If Nakheel is unable to repay debt with its own cash, it would need an “explicit government guarantee and even that would come at a high yield of over 10 percent,” he added.

The perception of Dubai’s credit risk is the third worst in the Middle East and North Africa after Egypt and Lebanon. Credit default swaps have risen 17 basis points this year to 462, more than three times Abu Dhabi’s, which were at 143, data provided by CMA show.

Dubai and its related companies shoulder $129.3bn of debt, amounting to 149 percent of GDP, of which $15.5bn is due in the coming 12 months, according to Bank of America Merrill Lynch estimates. The emirate borrowed the money during a regional economic boom to turn itself into a financial, trade and tourism hub.

Dubai has pledged to stand behind its “strategic investments,” Mohammed Al Shaibani, director general of Dubai ruler’s court, said in September.

Some issuers in the emirate have gotten good response to their debt sales. This month, Dubai-based Emirates Islamic Bank, a unit of Emirates NBD, received $1.5bn in bids for its $500m five-year Islamic bond, a banker familiar with the deal said on Wednesday.

Sales of Islamic bonds in the Gulf rose more then 60 percent last year to $7.35bn, according to data compiled by Bloomberg.

Risks remain in the UAE property sector as prices and rents for residential real estate are poised to drop a further 10 percent to 15 percent this year as excess supply hits the market, Arqaam Capital analyst Mohammad Kamal said this month.

Some 25,000 homes should reach completion this year in Dubai, followed by a similar number in 2013, he said.

Forty percent of properties in the city, home to the world’s tallest skyscraper and an indoor ski slope, are already vacant, according to Jones Lang LaSalle estimates.

Apart from local market factors, Europe’s debt crisis could also contribute to Nakheel’s challenge in raising debt as banks scale back their regional business and data show Germany, Europe’s largest economy, may be on the brink of recession.

“The increasing volatility coming from Europe pushed many companies to postpone coming to the market,” Royal Capital’s Talhouli said. “Last year was not as good as expected in terms of issuance. At the same time, we are getting closer to deadlines and refinancing needs especially from Dubai entities.”