Nakheel Shuns Bond Issuance in Favor of Bank Loans: Arab Credit

Nakheel PJSC, developer of Dubai’s Palm island, ruled out selling bonds to fund hotels, malls and retail outlets, betting its recovery from the brink of default five years ago will win it cheaper funding from banks.

“We will not go for a bond,” Chairman Ali Rashed Lootah said in a June 29 interview. “Bonds are more expensive than commercial lending from the banks actually. We are in a strong position to negotiate with lenders, with banks, and get good terms especially after what we have achieved.”

Nakheel, which drove Dubai near default in 2009, announced plans June 25 to repay all of its 5.54 billion dirhams ($1.5 billion) of bank loans four years early as real estate demand surges and customer collections improve. While the yield on its August 2016 sukuk fell to a record 4.62 percent two days later, paying off the debt would end restrictive terms from its restructuring and allow the developer to seek better financing options, Lootah said on June 25.

“Banks should be willing to look at them again and possibly offer them better rates” if Nakheel’s balance sheet is strengthening and it improves enough, said Asjad Yahya, an analyst at Dubai-based investment bank Shuaa Capital.

Bank lending in the United Arab Emirates jumped 8.3 percent in April from a year earlier, central bank data on Bloomberg show. The loan-to-deposit ratio at the country’s 51 banks, a measure of liquidity, improved to 98 percent at the end of April from 106 percent in March 2010, data compiled by Bloomberg show. That helped reduce the three-month Emirates interbank offered rate, or Eibor, a benchmark used to price some loans, to 0.73 percent yesterday, the lowest since at least 2006.

Yields Fall

Nakheel could probably borrow at rates about 200 basis points over three-month Eibor, according to Jaap Meijer, head of equity research at Arqaam Capital Ltd. in Dubai.

The yield on Nakheel’s 4 billion-dirham, 10 percent sukuk maturing in two years rose two basis points to 4.64 percent yesterday. That’s down 1.98 percentage points from the start of the year and compares with an average rate of 4.16 percent for JPMorgan Chase & Co.’s MECI Sukuk index on June 27.

The U.A.E.’s central bank warned on June 8 that the country’s real estate market may be overheating. A restructuring at Arabtec Holding Co. (ARTC), the emirate’s largest listed contractor, stoked concern the market’s property-led gains in the past two years were overdone.

Dubai stocks posted their biggest monthly retreat in almost six years in June as investors fled property stocks. The DFM General Index (DFMGI) lost about 23 percent, the most since November 2008. The gauge entered a bear market last week after plunging 20 percent from the peak in May. Emaar Properties PJSC (EMAAR), the developer with the biggest weighting on the measure, decreased 3.7 percent yesterday. Arabtec fell 10 percent, the most allowed in a day.

Building Income

Nakheel is planning to develop income-producing assets, including 2,900 hotel rooms in the next three years as well as 7.9 million square feet of shops, restaurants and leasing space. Its cash collection from customers reached 25.1 billion dirhams, compared with 18.2 billion dirhams originally envisaged, according to documents provided by the company.

The developer has achieved 23 billion dirhams worth of “improvements” from the original restructuring plan, Nakheel said. That includes sales of properties and settlements with creditors where Nakheel’s payouts were around 15 percent of amounts claimed, according to the document.

Building a portfolio of rental assets “makes a lot of sense because whenever the cycle slows down then those cash flows can help a developer sustain income,” Shuaa Capital’s Yahya said. “When the economy improves, then they can start selling property again.”

Nakheel’s Lootah said the company would probably seek to borrow from local banks, which provided about 60 percent of the developer’s loans before the global financial crisis hit. “They know us and we know them,” he said.

Nakheel “will get the funding but with a slight mark-up,” Arqaam Capital’s Meijer said. “The appetite to lend has dramatically improved as did the cost of funding allowing banks to reprise loans and ease lending standards.”

To contact the reporter on this story: Zainab Fattah in Dubai at zfattah@bloomberg.net

To contact the editors responsible for this story: Andrew Blackman at ablackman@bloomberg.net Jeffrey St.Onge, Stephen Kirkland

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