Trade creditors may need to offer 5% more to attract sukuk buyers after debt revamp
Nakheel’s trade creditors may have to offer yields of more than 15 percent to lure buyers to Islamic bonds they will receive as part of the Dubai-based developer’s $10.5bn debt restructuring.
While Nakheel plans to issue the sukuk with an annual return of 10 percent, the new owners will have to offer about five percentage points more to attract buyers, according to Dubai- based Mashreq Capital DIFC Ltd estimates. London-based investment bank Exotix Ltd puts the premium at 10 percentage points. Bankers are negotiating prices with creditors even before the bonds have been issued, they said.
A yield at those levels would be more than triple the 4.78 percent on Dubai's 6.396 percent dollar sukuk maturing in November 2014. The yield on Riyadh, Saudi Arabia-based Dar Al Arkan Real Estate Development Co.’s 10.75 percent Islamic bond maturing in February 2015 was 11.13 percent on Wednesday.
Nakheel, a Dubai World subsidiary, plans to issue sukuk to pay 60 percent of what it owes suppliers and contractors and the remainder in cash.
“It doesn’t make sense to buy unsecured five-year Nakheel risk without a government guarantee at anything below 20 percent,” Ahmad Alanani, Dubai-based head of fixed-income sales for the Middle East and North Africa at Exotix, said on Tuesday. “The company’s project pipeline is dubious, their portfolio is concentrated in the UAE and leverage remains high.”
Progress on debt restructurings in the UAE, including state-owned Dubai World’s accord in March with creditors to alter terms on about $25bn of obligations, have helped push borrowing costs to the lowest in almost six-years. Nakheel renegotiated terms after the deepest financial crisis since the 1930s roiled Dubai’s real-estate market.
The developer will be separated from Dubai World and fully owned by the emirate’s government after its restructuring is completed, the company said May 18.
“Any investor would have to determine the degree to which a government-related entity is explicitly or implicitly backed by the sovereign,” according to Samer Solh, managing director of asset management at Amwal QSC, a Doha-based investment bank said. “This is a lesson learned by many investors in the last two years in the region.”
Nakheel’s 2.75 percent sukuk, which was paid off by the Dubai government when it matured in January, last yielded 16.7 percent, data compiled by Bloomberg show. The government also committed $8bn last year to support Nakheel’s refinancing and help complete projects.
Nakheel so far paid a total of AED4.6bn ($1.3bn) to its trade creditors, the company said March 29. It may issue about AED4.8bn of sukuk to pay contractors, Abu Dhabi-based newspaper Al Ittihad reported May 23, citing Chairman Ali Lootah.
Arabtec Holding Co, a Dubai-based construction company that signed the creditor’s debt agreement with Nakheel, doesn’t plan to sell the Islamic bonds at less than what the developer is paying, according to Chief Financial Officer Ziad Makhzoumi.
“The recent call I had was in the high 80s, cash on the table,” Makhzoumi said in a telephone interview on May 23. “Why would I sell it at a discount? Ten percent is very attractive if you compare it to the yield on Emaar’s sukuk, which is also a Dubai-linked developer.”
The rate on Emaar Properties’s 8.5 percent Islamic dollar bond maturing in August 2016 increased three basis points, or 0.03 percentage point, to 7.05 percent on Wednesday, according to Bloomberg prices. The developer is 31 percent owned by the Dubai government, data compiled by Bloomberg show.
The yield on Dubai’s 6.396 percent dollar sukuk maturing November 2014 fell 170 basis points so far this year to 4.78 percent on Wednesday. The difference in yield between Dubai’s debt and Malaysia’s Islamic bond widened four basis points to 230 on Wednesday, down from 338 at the end of last year.
The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most traded ringgit-denominated bonds, rose to 102.474 on Tuesday, bringing the gain for the quarter to 0.6 percent.
Average yields for Arabian Gulf sukuk fell five basis points to 4.51 percent on Tuesday, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. The extra yield investors demand to hold Gulf debt over the London interbank offered rate narrowed seven basis points to 282, the data show. The debt returned 3.2 percent this quarter, the data show. Fixed-income securities in developing nations rose 2.8 percent since the end of March, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
Property prices have fallen more than 60 percent since mid-2008 as banks cut mortgage lending, forcing some “cash- starved” investors to seek buyers for their sukuk, according to Amwal’s Solh. Citigroup Inc is one of the financial institutions offering to facilitate trades of Nakheel’s sukuk, according to an e-mailed statement on May 23.
“Companies with financial obligations who have to repay contractors and suppliers as a result of their work for Nakheel would want to repay their debts even if it means they would have to sell the sukuk at lower prices,” UAE Contractors’ Association Chairman Ahmed Saif Belhasa said in a phone interview May 22.
Sales of Islamic debt in the six-member Gulf Cooperation Council slumped 41 percent to $1.36 billion this year amid political unrest in the Middle East, including Bahrain, data compiled by Bloomberg show.
“Given the lack of supply in the sukuk market, and given that Dubai spreads have tightened quite a bit, demand now will be stronger than it was three or six months ago,” Abdul Kadir Hussain, who helps manage $2bn as chief executive officer at Dubai-based Mashreq Capital, said in a phone interview on May 23.
“Nakheel’s sukuk will probably be treated initially as the highest risk profile paper in Dubai, until we get more details on how the company will repay it.”
Anybody paying above 70% of face value of the Nakheel Sukuk is either very brave or very stupid or both.
Who would touch a Nakheel sukuk which has minimal cash flow, a mountain of debt and most importantly the distinction of treating its investors and customers shabbily.