‘There are more sellers than buyers’ for sukuk given as part payment for trade debts
Nakheel’s Islamic bonds, which were issued to contractors and suppliers instead of cash as part of a $16.1bn restructuring plan, fell in their first week of trading as holders flooded the market.
The state-owned builder of man-made islands off Dubai’s coast saw the yield on its sukuk soar 108 basis points since Sept 9, or 1.08 percentage points, to 17.08 percent on Sept 16, according to prices at Standard Chartered.
The rate on Dubai government’s 6.396 percent sukuk due November 2014 gained eight basis points last week to 4.88 percent on Sept. 16, according to data compiled by Bloomberg.
Nakheel issued AED3.8bn ($1bn) of Islamic bonds to trade creditors after the developer was unable to pay them. One sukukholder invited six banks, including Morgan Stanley and Abu Dhabi Commercial Bank, to bid for about AED320m of Nakheel’s sukuk on Sept 20, two bankers familiar with the matter said, declining to be identified because the information is confidential.
“There are more sellers than buyers,” Mark Watts, head of fixed-income at National Bank of Abu Dhabi’s asset management group, which manages AED4.1bn ($1.1bn), said Sept 15.
“Half of the game is doing good, solid, fundamental analysis, and knowing the supply and demand dynamics of the bond you’re holding. These trade creditors are not natural bondholders.”
Dubai’s property market had one of the world’s biggest reversals following the global credit crisis three years ago, with home prices slumping 64 percent since they peaked in mid-2008, Deutsche Bank estimates. Nakheel, which isn’t rated, delayed payments and wrote down its real estate by $21.4bn since 2008. The company cut jobs and halted projects including the man-made islands of Palm Deira and Palm Jebel Ali.
Nakheel received an $8.6bn bailout from Dubai’s government, helping it avoid default. The company got state funds to settle a $750m sukuk in January that last yielded 16.71 percent on Jan. 14, data compiled by Bloomberg show. Nakheel was a former unit of Dubai World.
“Nobody knows where to price Nakheel’s sukuk,” Adnan Haider, head of fixed income and equity at Abu Dhabi Commercial Bank, said in a phone interview Sept 15.
“There aren’t that many trades printed, and there’s more sukuk coming into the market, so how do you determine the price?”
The developer plans to issue an additional AED1bn of bonds as part of an AED8.5bn program. The Islamic bonds are being used to pay 60 percent of what’s owed to contractors and suppliers. The rest is being paid in cash. Sukuk pay asset returns to comply with Islam’s ban on interest.
Nakheel had a profit of AED58.9m in the first half of 2010 after a loss of AED13.4bn a year earlier, according to its Islamic bond prospectus distributed last. It had a loss of AED76.6bn in 2009.
The company is building up its leasing business and has increased occupancy in its 20,000 rental units to 70 percent from 40 percent last year, Chairman Ali Rashed Lootah told reporters on Aug 24. The changes in its business plan show Nakheel is “cleaning up” its balance sheet, Matthew Green, head of UAE research at real-estate broker CB Richard Ellis Group, said last week.
Still, about 54,000 homes in Dubai will come onto the market from 2011 to 2015, about 15 percent to 20 percent of the existing supply, Jones Lang LaSalle estimates. That may lead to further price declines, according to the real-estate broker. While Nakheel is government-owned, Dubai has not guaranteed the sukuk.