Nakheel Bonds Show Confidence in Dubai Debt Restructuring: Islamic Finance
A construction worker crosses the temporary sand bridge joining the islands of Germany and Monte Carlo on the "The Heart of Europe" resort, part of the The World development. Photographer: Gabriela Maj/Bloomberg
The Islamic bond market is showing that Dubai is regaining investor confidence after a group of creditors agreed to restructure Nakheel PJSC’s debt.
The average yield on sukuk sold by Gulf Cooperation Council borrowers fell eight basis points yesterday to 7.23 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It reached 8.76 percent on Dec. 11 after Dubai investment companies announced plans to restructure debt in November. The yield on Nakheel’s 2.75 percent $750 million Islamic notes due in January 2011 fell one basis point to 15.29 percent today, its lowest level this year, according to prices compiled by Bloomberg.
Creditor banks “unanimously supported” a proposal on altering the terms on $10.5 billion of loans and unpaid bills, Nakheel, the Dubai World-owned property developer, said yesterday. The yield difference on GCC sukuk and the London interbank offered rate narrowed six basis points yesterday to 535 basis points from as wide as 647 at the end of November.
“Positive news building on positive news rapidly gets discounted,” said Michael Roche, an emerging-market strategist at MF Global Holdings Ltd., a New York-based broker. “The way that’s been discounted is the sukuk bond sector having its spread narrowed, some of the risk premium taken out of the bonds.”
The price of sukuk issued by Nakheel, which is building palm tree-shaped islands off Dubai’s coast, has risen to 108.11 from 107.50 at the end of last month and as low as 37.5 on Dec. 9. The yield has dropped from a record 140 percent. The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
‘Reduces Uncertainty’
Islamic bonds in the GCC may extend gains if Nakheel and Dubai World resolve their debt problem, said Zeid Ayer, who helps oversee $1.6 billion as chief investment officer at CIMB- Principal Islamic Asset Management Sdn., a joint venture between Principal Global Investors LLC of the U.S. and Malaysia’s CIMB Group Holdings Bhd.
Nakheel plans to offer creditor banks interest of 4 percentage points more than benchmark rates on new loans as part of the debt restructuring, two bankers with knowledge of the plan said yesterday. In return, lenders would agree to extend the life of the loans by five years, said the people.
“It shows that a restructuring can be successful,” Zeid said in an interview in Kuala Lumpur yesterday. “It’s a sign of a market maturing and it reduces uncertainty regarding how events might play out should something like this happen again.”
Nakheel and Dubai World, one of the emirate’s three main state-owned holding companies, are seeking to renegotiate terms on their debt after the deepest financial crisis since the 1930s roiled the emirate’s real-estate market and left companies unable to raise new funding. Dubai property prices have slumped more than 50 percent from their peak in August 2008 as mortgages dried up, according to estimates from Colliers International.
Narrowing Yields
Dubai World and its seven-biggest lenders will present a restructuring plan to almost 70 creditors on July 22, a person familiar with the matter said on July 11, declining to be identified. The company said on May 20 it had reached an agreement to restructure $23.5 billion of liabilities, offering creditors 1 percent interest on loans and additional interest on maturity ranging from 1 percent to as much as 2.5 percent.
DP World Ltd.’s 6.25 percent dollar-denominated Islamic bonds due in July 2017 have rallied since the end of May, pushing yields down by 56 basis points to 8.4 percent, according to data compiled by Bloomberg. The yield fell five basis points today.
No ‘Final Default’
The yield gap between the Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 and the Malaysian government’s 3.928 percent Islamic note due June 2015 has widened 34 basis points since May 28 to 415 basis points, according to data compiled by Bloomberg. Dubai’s notes yielded 7.40 percent today, down five basis points from yesterday.
“The Nakheel experience produced a lot of volatility and trading losses without a final default,” said Zurich-based Tobias Bettkober, a convertible bond manager overseeing $400 million at Holinger Asset Management. “It will still be a long way and substantial changes in issuance conditions before they can come back to the market because they harmed themselves and Dubai with this execution track record.” Holinger previously owned Nakheel debt.
Gulf issuers sold $2.5 billion of Islamic notes so far in 2010, down 13 percent from a year earlier, Bloomberg data show. Islamic securities returned 6.9 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 7.4 percent over the same period, according to JP Morgan Chase & Co.’s EMBI Global Diversify Index.
‘In Principle’ Support
Nakheel said in a statement yesterday the terms of its restructuring are supported “in principle” by the coordinating committee of its creditor banks and it expects to complete the restructuring over the “coming months.” Banks were asked to respond by Aug. 31, said a company spokesman, who declined to give further details.
Nakheel said March 25 that its secured bank creditors will receive 100 percent of their principal and accrued interest under an agreement to extend the loan maturities. The developer has one dollar loan outstanding, a $1.85 billion facility that was signed in August 2007 and maturing in 2012, according to data compiled by Bloomberg.
“If in the future they can show that they can handle it better, then the additional cost for future issuance might well be limited” for Nakheel, Bettkober said.
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net
Rate These Stories
Rate this Page