Nakheel's trade-creditor bond to boost trading

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SUKUK PLAN: Nakheel may issue as much as $3.2bn of five-year sukuk to pay contractors as part of its debt restructuring plan. (Getty Images)

SUKUK PLAN: Nakheel may issue as much as $3.2bn of five-year sukuk to pay contractors as part of its debt restructuring plan. (Getty Images)

Nakheel’s plan to offer Islamic bonds to creditors may revive sukuk trading in the Arabian Gulf after new sales fell to a five-year low, according to Moody’s Investors Service and Mashreq Capital DIFC Ltd.

Nakheel, controlled by state-owned Dubai World, may issue as much as $3.2 billion of five-year sukuk to pay contractors as part of its debt restructuring plan, JPMorgan Chase & Co. said in a report Aug. 26. Islamic debt issues from the Gulf have slumped 24 percent to $2.5bn this year, according to data compiled by Bloomberg.

Contractors are likely to sell Nakheel’s sukuk to pay bills, Thomas Barry, chief executive officer of Arabtec Construction LLC, a unit of Arabtec Holding Co., the United Arab Emirates’ biggest construction company, said in an interview Sept. 2. “All contractors are in very bad situation with regard to cash flow because of nonpayment from many entities.”

Nakheel, which has built palm tree-shaped islands off Dubai’s coast, said July 14 a group of its creditor banks supported a plan to alter the terms on $10.5 billion of loans and unpaid bills. In April, the company said its trade creditors would be offered 100 percent recovery of their claims -- 40 percent through a cash payment and 60 percent in the form of a tradable sukuk.

More than 80 percent of Nakheel’s contractors have agreed and the sukuk “will be issued in due course,” a Nakheel spokesperson said in an e-mailed response on Sunday, declining to provide further details.

The sukuk “will generate interest and create trading opportunities for hedge funds and fixed-income investors,” Khalid Howladar, a Dubai-based senior analyst at Moody’s, said in an interview on Sunday.

Sukuk sales from the region are likely to pick up in the fourth quarter, Abdul Kadir Hussain, chief executive officer in Dubai at Mashreq, which manages $2 billion of mainly Arabian Gulf assets, said in an interview on Sept. 1. “The level of investor interest and pricing will depend on how much information Nakheel decides to share with the market, about its business plan and its ability to repay.”

The yield on Nakheel’s 2.75 percent $750 million Islamic notes due in January 2011 fell 88 basis points to 14.69 percent last week, according to prices compiled by Bloomberg.

It was at 86 percent on March 24, when Dubai’s government said it would support the company with $9.5 billion.

The average yield on sukuk sold by Gulf Cooperation Council borrowers fell 1 basis point Sept. 3 to 6.48 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It reached 8.76 percent on Dec. 11 after Dubai investment companies announced plans to restructure debt in November.

Governments in the Arabian Gulf haven’t borrowed through global sukuk sales since the Dubai Department of Finance issued a $1.25 billion Islamic bond in October.

This year, Saudi Electricity Co., the region’s largest utility, sold 7 billion riyals ($1.87 billion) in April. Dar Al Arkan Real Estate Development Co., the biggest Saudi Arabian developer by market value, and National Bank of Abu Dhabi PJSC, the second-biggest bank in the United Arab Emirates, sold Shariah-compliant debt in U.S. dollars and Malaysian ringgit.

Malaysia, the world’s biggest issuer of Islamic bonds, sold $1.25 billion of notes in May, this year’s largest sovereign offering of debt that complies with Shariah principles. Companies from Malaysia raised 17 billion ringgit ($5.5 billion) from local-currency sukuk so far in 2010, Bloomberg data show.

Nakheel and its parent Dubai World, one of the emirate’s three main holding companies, are renegotiating debt terms after the deepest financial crisis since the 1930s roiled Dubai’s real-estate market and left companies unable to raise financing. Property prices have fallen more than 50 percent in the city as banks cut mortgage lending, according to estimates from Colliers International.

The developer aims to settle 1.5 billion dirhams ($408 million) it owes to contractors in September, Chairman Ali Lootah was cited as saying by the Al Bayan newspaper on Aug. 30.

Nakheel plans to list the sukuk on Nasdaq Dubai, said two people familiar with the plan in April.

The sukuk to be issued against trade claims is estimated to have a fair value in the low 60 cents to the U.S. dollar, JPMorgan Chase’s London-based analyst Zafar Nazim wrote in the report. The property company will be able to make almost all coupon payments on the five-year Islamic bonds although “we are less confident about Nakheel’s ability to redeem the principal in 2015,” he said.

The spread between the average yield for sukuk and the London interbank offered rate narrowed 16 basis points to 385 in August.

It was at 375 basis points on Sept. 3.

The extra yield investors demand to hold the Dubai Department of Finance’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 widened 3.8 basis points to 412.5 basis points in August, according to Royal Bank of Scotland Group Plc data. The gap has narrowed to 387 since.

Sukuk returned 10.2 percent in 2010, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing nations gained 12.8 percent, EMBI Global Diversified Index showed.

“Large parts of Nakheel’s property portfolio aren’t performing,” said Harald Eggerstedt, head of credit research at RIA Capital Markets Ltd., an Edinburgh-based securities broker and advisory company that buys corporate bonds from the Gulf including Islamic debt for wealth managers.

If the restructuring plan “puts the new Nakheel onto a sound footing, the sukuk will be a success and should trade up in price to reflect the attractive cash flow,” he said. “It would also allow Nakheel to replace more bank debt with new sukuk.” (Bloomberg)

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