Barclays Capital calls to offload Nakheel sukuk

Nakheel bondholders will recover less than half of their investments as the property developer's parent company renegotiates US$22 billion of debt.

Nakheel bondholders will recover less than half of their investments as the property developer's parent company renegotiates US$22 billion (Dh80.80bn) of debt, Barclays Capital analysts estimate. Their comments came in a report that recommended investors sell their Nakheel Islamic bonds, or sukuk. How much money banks and investors can expect to recover from Nakheel and its parent Dubai World has been a subject of intense speculation since the conglomerate announced in December that it would seek to restructure the debt.

"The final recovery value for Nakheel is likely to be negotiated at 40 per cent to 50 per cent," said the London-based Barclays Capital analysts Alia Moubayed and Milena Ianev in a report released Monday. The restructuring, according to analysts and people close to the negotiations, could involve a refinancing of debt with new bonds issued by Dubai World, an extension of maturities on debts or, a combination of the two.

Most observers expect banks and investors owed money by the Government-owned conglomerate to be asked to accept less, but estimates so far have been in the range of 30 per cent. EFG-Hermes, an Egyptian investment bank, and BNP Paribas, a French bank, recently estimated that investors in Nakheel's Islamic bonds, or sukuk, could expect recovery rates of up to 70 per cent, according to a Bloomberg report.

Nakheel, the developer of Dubai's iconic palm-shaped islands, has two outstanding sukuk: a Dh3.6 billio n ($980m) issue that is due in May, and a $750 million bond due in January next year. The Dh3.6bn sukuk is currently trading at 71.75 cents on the dollar, up from 45 cents on the dollar in December. The $750m sukuk is trading at 63.9 cents, up from 37.5 cents last month. Nakheel, which struggled as property values in Dubai declined and international credit markets seized amid the financial downturn, is central in Dubai World's restructuring plans.

The company last month paid off another $3.52bn sukuk with the help of a $10bn relief package from the Abu Dhabi Government. The Barclays Capital analysts recommended investors sell the Nakheel sukuk, arguing that recovery rates of 40 to 50 cents on the dollar did not justify their current prices. "We would therefore be sellers of Nakheel 2010 and 2011 paper at current levels," they said. But Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai, said it was too early to start assessing recovery rates on Nakheel's debt, given the high level of uncertainty that still surrounded Dubai World's restructuring plans.

Dubai World has yet to make a restructuring proposal to creditors, and is expected to present a plan for a debt standstill to a creditors' co-ordinating committee as early as this week. The standstill agreement would give Dubai World a reprieve on debt repayments until at least the end of May, allowing the company time to negotiate the $22 bn restructuring proposal. "It's premature to try to come up with recovery values on Nakheel, because there clearly is not enough information for bondholders to really ascertain what sort of sustainable debt levels the company can take and, based on that, what kind of recoveries you will get," Mr Hussain said.

Nakheel yesterday announced it will make a regular payment of $10.3m on its 2011 sukuk on January 19. @Email:[e-mail]