Need for cash outweighs hope of full repayment for some companies
Some trade creditors of Nakheel are offering a potential $1.6bn Islamic bond by the developer at a discount in the secondary market as a desperate need for cash outweighs hopes for a full repayment.
Nakheel, which is restructuring $10.9bn in debt, plans to repay 60 percent of its outstanding debt to trade creditors through the sale of a AED6bn ($1.63bn) Islamic bond, expected by the end of the first half.
But some of the developer's trade creditors have already offered the bond in the secondary market at around 80 cents to the dollar as they seek to cash out rather than wait five years for repayment.
"The bonds are currently being offered at 80 cents to the dollar and the bids are at high 70s," said Ahmad Alanani, head of Middle East North Africa fixed income sales at Exotix in Dubai.
"Offers are contingent on the sale of the bond, but so far we have little details on the commercial terms of the sukuk."
Alanani, whose firm is working on a transaction with one of the trade creditors, said the size of the offering is AED50m ($13.6m). Other trade creditors are also offering to sell in the market but lot sizes are small, he added.
Nakheel, which said on Wednesday its chief executive was leaving the firm after finishing his term, was planning to list the bonds on Nasdaq Dubai.
The developer has said it expects its debt restructuring to be completed by the first half of 2011 and stated it would issue term sheets for the Islamic bond.
Many of Nakheel's trade creditors who have been impacted by the property downturn are in need of cash to pay their bills and hence could be forced to take a hit, analysts say.
"If your business has been suffering for two years, you will want to take that hit now because you need the cash, either to pay debts or put into your own businesses," said Mohammed Yasin, chief investment officer for CAPM Investments.
However, not all are in a mood to cash out fast.
Dubai developer Arabtec's chief financial officer Ziad Makhzoumi said the company had not been approached by any buyers and does not have plans to sell the sukuk.
"Arabtec is not interested in selling its sukuk. We think it’s a good one to keep," he said.
Asked if the price of 80 cents seems a reasonable discount, he said, "If you have a new car and you are desperate to sell it you will take a discount."
Nakheel, which overstretched itself building islands in the shape of palms and other ambitious projects, is part of state-owned Dubai World which has completed a $25bn restructuring with banks.
Ah so, wait another five years on top of the two and a half years you have already waited for your next 60 per cent payment or take a 20 per cent haircut.
The impending sukuk does not seem to be valued very highly by the financial community, who presumably would be the initial buyers and find it more attractive if the sukuk was backed by government guarantees.
The question is will those trade contractors ever elect to work with the company again. Personally I'd want some form of upfront liability deposit these days or be able to insure my invoices against non-payment in reasonable timescales. However, not even sure that the latter practice is an available option here, certainly possible in Europe. No doubt the mention of adopting European methodologies will bring down a litany of protest.
I think any new work happening here will be done by "fresh" contractors. I seriously doubt that the ones who had experienced the business approach here will come back.
So expect a drop in quality for any new work happening here, if anything is built at all.