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Nakheel, the indebted property developer owned by Dubai World, is preparing investors for a “liability management exercise” over the terms of a sukuk due for repayment in May 2010. A source close to the company confirmed press reports that Nakheel was seeking up to date details of its bondholders with a view to informing them of likely new terms of repayment of a US$980 million (Dh3.59 billion) bond due on 13 May 2010.

 

In a request via the clearing house Euroclear, Nakheel asked bondholders to supply details as “this may prove useful in disseminating information to the note holders in the future with regard to a liability management exercise that the issuer may undertake”.

 

Nakheel’s parent company, Dubai World, is in the process of preparing an offer to creditors over $26bn of debt it has earmarked for restructuring.

 

Reports last week cited people familiar with the negotiations as saying it was “highly unlikely” that the $980m sukuk, or Sharia-compliant bond, would be fully repaid. In those circumstances, sukuk holders are likely to join the pool of unsecured creditors of Nakheel, which includes the Government of Dubai, some 96 banks and contractors awaiting payment for completed work.

The sukuk was issued in late 2007 as Dubai neared the peak of its property boom. It was trading last week at 52.5 per cent of issue value, indicating that investors were expecting a significant discount as part of any proposals Dubai World would put forward over the next few weeks (see item on Dubai World).

 

February 28, 2010

 

 

Analysis and Forecast: Increasing Risk

 

The news from Nakheel that repayment of the Islamic bond – sukuk, which matures in May, is not unexpected. However, it confirms suspicion that support from Abu Dhabi is not freely coming. A default by Nakheel will impose further pressure on Dubai World and other government-related entities as ratings will likely be downgraded.