JPMorgan Chase & Co. is advising clients to buy Nakheel PJSC’s Islamic bonds after last month’s record slump as new projects boost the Dubai developer’s earnings, while government backing makes a default improbable.
State-run Nakheel’s 4.27 billion dirhams ($1.2 billion) of sukuk yielded 9.89 percent at 6:05 p.m. in Dubai, down six basis points this month, after surging 179 basis points in June. That’s more than twice the average gain in yields on corporate Islamic debt tracked by HSBC/Nasdaq Dubai indexes. JPMorgan listed Nakheel in a July 4 research note as its “top overweight recommendation” among Dubai real-estate debt.
Nakheel will manage to pay or refinance as much as half of the $3 billion of debt due in 2016 as it generates at least $1 billion from new projects and land sales, JPMorgan said. Investors have demanded higher yields to hold Nakheel’s bonds since the company drove Dubai to the brink of default in 2009, prompting the government to extend a bailout.
“The government is quite unlikely to let Nakheel default on its bond obligations in 2016 after supporting the company under much more difficult circumstances,” JPMorgan analyst Zafar Nazim wrote in the note. “Nakheel has been a beneficiary of real-estate recovery in Dubai. We believe that new project launches and plot sales were not baked in the original restructuring plan that was agreed in 2010.”
Exotix Ltd. today raised its rating on the sukuk to hold from sell, saying the company will likely generate $800 million in cash before the debt is due.
Nakheel, known for building an island shaped like the frond of a palm tree and another like a world map off Dubai’s coast, has received at least $8 billion of cash from the government since announcing a standstill agreement with creditors in 2009, JPMorgan said.
The real estate industry in Dubai, one of seven sheikhdoms of the United Arab Emirates, has started recovering from a crash that sent prices plunging more than 65 percent. New projects such as the world’s biggest Ferris wheel, a new district with 100 hotels and the world’s largest mall were unveiled in the past year.
Sale prices for residential units have risen 28 percent from a trough in January 2011, according to an index tracked by Jones Lang LaSalle. Dubai’s economy grew 4.4 percent in 2012, the fastest pace in five years. Against this backdrop, JPMorgan also recommends Islamic debt of Emaar Properties PJSC, developer of the world’s tallest tower, and Jebel Ali Free Zone Authority FZE, which leases commercial real estate in Dubai.
The yield on Emaar’s 6.4 percent securities due in July 2019 has declined 24 basis points this month to 5.6 percent today, while Jafza’s 7 percent sukuk due a month earlier yielded 5.41 percent, down 31 basis points. The yield on HSBC/Nasdaq Dubai’s Corporate U.S. Dollar Sukuk Index advanced 73 basis points last month.
“Dubai was able to avert bond default in all of its government-related entities and its economy has recovered to pre-crisis levels,” JPMorgan said. “Nakheel has been a beneficiary of real-estate recovery in Dubai.”
Dubai’s credit risk returned this year to levels it hasn’t seen since late 2008 amid the global credit crisis, after state-linked companies paid or refinanced at least $3.75 billion since the start of 2012. Five-year credit default swaps, which protect investors against non-payment of debt, dropped 130 basis points in the past year to 220 on July 5, according to CMA. Middle East contracts fell 13 basis points, on average, to 302 in the period.
Still, property prices in Dubai are likely to ease “due to high levels of future supply, limited debt availability and more mature market regulations,” Alan Robertson, chief executive officer for the Middle East and North Africa at Jones Lang LaSalle, said by e-mail yesterday.
Investors dumping emerging-market assets sold debt of Dubai property companies last month amid an emerging-market rout triggered by Federal Reserve plans to trim its bond-buying program. Nakheel’s debt isn’t rated, while Emaar’s bonds non-investment grade at Moody’s Investors Service and Standard & Poor’s.
“Dubai’s real estate is still considered a risky sector,” said Montasser Khelifi, Dubai-based senior manager for global markets at Quantum Investment Bank Ltd. “When there’s turmoil in the bond market, investors sell the debt, even though new projects in Dubai are announced regularly these days.”
Nakheel’s business prospects are improving. The company said in May it sold 471 villas valued at almost 1.9 billion dirhams. The developer also expects to sign an agreement with banks to extend the maturity by eight years from 2015 on 8 billion dirhams of debt, a spokeswoman said last month.
The success of those negotiations depends on the quality of the collateral backing the facilities, which isn’t currently public information, Gus Chehayeb, the Dubai-based research director for the Middle East at Exotix, said in today’s note.
“If the $2 billion of bank debt due in 2016 is extended then we believe it will be far less challenging for the company to satisfy the $1.2 billion sukuk repayment using a combination of internal cash and support from local lenders,” he said.