Oct. 21 (Bloomberg) -- Dubai World, the state-owned holding company grappling with $40 billion of debt, may be able to sell bonds to repay loans, including a $3.5 billion Islamic bond due at year-end, two bankers familiar with the group’s plans said.

Some of the money needed to settle the Islamic bond, or sukuk, of Dubai World’s real-estate unit Nakheel PJSC may be raised from a bond sale and the rest from local lenders, said the bankers, who declined to be identified because nothing has been decided yet. Some of Nakheel’s Middle Eastern bondholders may accept an offer to extend the bond’s maturity, they said.

“Market sentiment has improved a lot,” said Abdul Kadir Hussain, chief executive officer of Mashreq Capital (DIFC) Ltd., a Dubai-based fund management firm. Dubai will still “not only have to be pretty transparent about how the sukuk will be refinanced, but also what their strategy is to tackle the emirate’s entire debt situation,” he said.

The cost of protecting against a default on Dubai’s bonds for five years has fallen 70 percent from a two-year high in February, ranking it between Lithuania and Lebanon, data compiled by Bloomberg show. A successful repayment of the Islamic bond, on which investors were concerned Nakheel may default after a slump in property prices, will make it easier for banks to reschedule $12 billion of Dubai World’s debt that mature during the next three years, the bankers said.

Nakheel Bonds Rise

The price of Nakheel’s $3.52 billion bond due in December rose 0.8 percent, the first gain in seven days, to $1.07 as of 6:30 p.m. in Dubai, according to Standard Chartered data on Bloomberg. It slumped to 63.5 cents on the dollar in February on concern Dubai was contemplating restructuring the bond.

“This development has been perceived very positively by the market and for Nakheel,” said Jamil Hallak, head of credit trading or the Middle East at Standard Chartered Plc in Dubai.

The decision to sell bonds will hinge in part on how much money Nakheel gets from a $20 billion rescue fund the government is raising, the bankers said. Both the fund and Dubai World’s creditors are seeking more disclosure on the company’s business plan, cash flow projections and its strategy to repay debt, they said. Creditors haven’t yet reached consensus on giving Dubai World more time to repay the loans, they added.

Second $10 Billion

Dubai will probably complete raising the second $10 billion for the support fund to help state-owned companies through the credit crisis by the end of next month, Mohammed Alabbar, a member of Dubai’s Executive Council said Oct. 9.

A spokeswoman for Dubai World declined to comment.

Credit-default swaps tied to Dubai’s bonds, or the cost to protect against default, have fallen to 288 basis points from 976 basis points on Feb. 17, according to CMA DataVision prices.

“The government of Dubai is likely to be able to generate some demand from institutional investors in this region and internationally,” said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi PJSC. “The key will be how much demand exists and at what price.”

Dubai World’s advisers, AlixPartners LLP, Deutsche Bank AG and NM Rothschild & Sons Ltd., have drawn up alternative plans to repay the sukuk depending on whether Dubai’s fund agrees to provide Nakheel with between $1 billion and $2 billion this year, the bankers said.

Investor Meetings

The Government of Dubai will hold meetings with fixed income and Islamic investors in Asia, the U.A.E. and Europe starting Oct. 22, according to a banker involved in the transaction. The government is canvassing investor interest in the Dubai Civil Aviation Authority’s plan to sell bonds and pay down $1 billion of debt maturing next month, two bankers familiar with the transaction said Oct. 18.

Dubai and its state-related companies borrowed $80 billion to help transform the emirate into a financial services and tourist hub. The seizure of global credit markets sparked concern the emirate will be unable to repay some of its loans.

Dubai World said Oct. 15 it expects to save more than $800 million in three years after completing a reorganization and cutting 12,000 jobs. The Dubai government-owned company controls DP World Ltd., the world’s fourth-biggest port operator, developer Nakheel PJSC, which is building palm-tree shaped islands off the emirate’s coast, as well as Economic Zones World, an operator of business parks like Jebel Ali Free Zone.

Dubai World had $59 billion in liabilities at the end of last year and assets of $100 billion, Nakheel told Nasdaq Dubai Aug. 20. Some $18 billion of Dubai World’s debt is with companies such as DP World that have enough cashflow to service their debt, two bankers said. The remaining $22 billion is the concern, they said.

Dubai World Reorganizes

“We have the right organization size now for the current market,” Jamal Majid Bin Thaniah, Dubai World’s chief executive officer, said in an interview Oct. 15. The company has no “intentions at this point in time to sell businesses within Dubai World.”

Dubai World and its advisers are negotiating with its lenders, which number more than 70 and include Abu Dhabi Commercial Bank PJSC and Emirates NBD PJSC, its two biggest creditors, a person familiar with the situation said last week. Other lenders to Dubai World include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, the person said.

Representatives of Emirates NBD, HSBC, Credit Suisse, RBS and Lloyds declined to comment. Representatives for Abu Dhabi Commercial Bank and Barclays weren’t available to comment.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

Last Updated: October 21, 2009 11:13 EDT