Dubai firm to issue bonds to settle debts

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

Nakheel, controlled by state-owned Dubai World, may issue as much as US$3.2 billion ($4.43 billion) of five-year sukuk to pay contractors as part of its debt restructuring plan, JPMorgan Chase & Co said.

Islamic debt issues from the Gulf have slumped 24 per cent to US$2.5 billion this year, Bloomberg says.

Thomas Barry, chief executive officer of Arabtec Construction, a unit of United Arab Emirates' biggest construction firm Arabtec Holding, said contractors were likely to sell Nakheel's bonds to pay bills.

"All contractors are in a very bad situation with regard to cash flow because of non-payment from many entities."

Nakheel, which has built palm tree-shaped islands off Dubai's coast, said in July that a group of its creditor banks supported a plan to alter the terms on US$10.5 billion of loans and unpaid bills.

In April, the company said its trade creditors would be offered 100 per cent recovery of their claims - 40 per cent through a cash payment and 60 per cent in the form of a tradeable sukuk.

More than 80 per cent of Nakheel's contractors have agreed and the sukuk "will be issued in due course", a Nakheel spokesperson said.

The sukuk "will generate interest and create trading opportunities for hedge funds and fixed income investors", said Khalid Howladar, a Dubai-based senior analyst at Moody's.

Sukuk sales from the region are likely to pick up in the fourth quarter, said Abdul Kadir Hussain, chief executive officer in Dubai at Mashreq, which manages $2 billion of mainly Persian Gulf assets. "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 per cent US$750 million Islamic notes due in January next year fell 107 basis points to 14.7 per cent this month, according to prices compiled by Bloomberg.

It was at 86 per cent on March 24, when Dubai's government said it would support the company with US$9.5 billion.

The average yield on sukuk sold by Gulf Co-operation Council borrowers fell one basis point last Friday to 6.48 per cent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

It reached 8.76 per cent on December 11 after Dubai investment companies announced plans to restructure debt in November.

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

This year, Saudi Electricity, the region's largest utility, sold 7 billion riyals ($2.5 billion) in April.

Dar Al Arkan Real Estate Development, 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 US dollars and Malaysian ringgit.

Malaysia, the world's biggest issuer of Islamic bonds, sold US$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 ($7.6 billion) from local-currency sukuk so far this year, says Bloomberg.

Deutsche Bank AG, the second-ranked adviser on bond sales in the Middle East and North Africa this year, has a "robust pipeline" of future work in the Middle East, Salman Al-Khalifa, the bank's head of global markets for the Middle East and North Africa, said in a telephone interview from Dubai.

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 per cent in the city as banks cut mortgage lending, according to estimates from Colliers International.

The developer aims to settle 1.5 billion dirhams ($564 million) it owes to contractors this month, chairman Ali Lootah was quoted as saying by the Al Bayan newspaper last month.

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 60c to the US 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 last month.

It was at 375 basis points last Friday. The extra yield investors demand to hold the Dubai Department of Finance's dollar sukuk rather than Malaysia's 3.928 per cent Islamic note due June 2015 widened 3.8 basis points to 412.5 basis points in August, according to Royal Bank of Scotland Group data. The gap has narrowed to 387 since.

Sukuk returned 10.2 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing nations gained 12.8 per cent, 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, 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 on to 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