Clock ticking on Nakheel debt

Analysis Investors are watching intently as time runs down on the developer's US$3.52 billion sukuk.

DUBAI, UNITED ARAB EMIRATES - JULY 12:  A Nakheel flag as seen outside some villas on the Palm Jumeirah in Dubai on July 12, 2009.  (Randi Sokoloff / The National)  For Stock *** Local Caption ***  RS006-071209-NAKHEEL.jpg
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Investors are watching intently as time runs down on the developer's US$3.52 billion sukuk, and a $300 million instalment on another loan. They await some clue as to how their investments in Dubai-government backed firms will fare in the global financial crisis. Nakheel, the developer behind Dubai's palm-shaped islands, is quickly running out of time and options to handle a US$3.52 billion (Dh12.92bn) debt that comes due in December. The Islamic bond, or sukuk, must be repaid on December 14. But Nakheel, which has fallen on hard times since property prices in Dubai dropped at the end of last year, so far has not arranged a refinancing or restructuring of the bond. With Ramadan approaching at the end of this week, analysts and bankers say time is running short for Nakheel to find a way to pay off or restructure the debt, which has emerged as one of the emirate's biggest challenges. As Nakheel is a subsidiary of the Dubai Government-owned Dubai World, the sukuk is also seen as a bellwether for Dubai's readiness and ability to come to the rescue of state-linked companies that have felt the brunt of the financial crisis. It "remains a major test of the Government's willingness to support state companies", Moody's Investors Service said last week. Nakheel declined to comment on its forthcoming debt repayments. Some or all of the money to repay the debt may come from a $20bn bond programme the Dubai Government launched in February. Under the programme, the Government is borrowing the funds in two tranches and plans to use them to support the emirate's Government-linked companies. Dubai borrowed the first $10bn tranche from the Central Bank and it has been suggested that the second $10bn may come from a combination of the bank and international investors. James Sadler, the head of debt markets for the Middle East and Africa at UBS, told Bloomberg last week that the second $10bn tranche had to be raised soon, in part because of Nakheel's looming bond maturity. To "facilitate some sort of restructuring through a tender offer or cash incentive to extend the Nakheel's bond maturity, Dubai needs fresh money", Mr Sadler said. "They will need to raise the $10bn sooner rather than later." Getting fresh money, though, is not Nakheel's only challenge. According to one banker, who declined to be named, time has also become a pressing issue. A restructuring or refinancing deal would probably take between two and three months, given the complexity of the sukuk and the need to give investors time to respond to proposals. "Restructuring in its own requires time, so as we get closer to December and no announcements are made, investors rule out the possibility of restructuring," the banker says. If Nakheel were to start the process at the end of Ramadan, traditionally a quiet period for investors and markets, it would have less than three months to work out a solution acceptable both to Nakheel and the sukuk-holders, 75 per cent of whom would have to approve any restructuring. The company has been approaching large investors in its sukuk since late last year, bankers say, but no major progress has been made. Ironically perhaps, Nakheel's state backing may be as much of a hindrance as a blessing in its restructuring efforts. In order to have investors accept a restructuring, which may involve extending the maturity of the sukuk, buying back shares, paying off the debt with new loans or a combination of those measures, Nakheel has to show that it is in real danger of defaulting. If investors think the Government is likely to step in and back Nakheel, agreeing to a restructuring would not make sense if it were to leave them with anything less than full repayment. This factor, according to another banker, may be helping to push negotiations forward. Investors simply may be more likely to jump on the restructuring bandwagon as the bond's maturity nears and the possibility of a default becomes more palpable. Investors do not want to have to write off the debt, but nor would they like to accept an unfavourable restructuring deal if Nakheel would otherwise have made good on its obligations. But the fact that the firm has not made any announcement could be an indication that the company does plan to pay the money back at maturity, other investors say. And many still believe a default is not likely, given that the failure of any Dubai Government-linked company to repay debts would affect the emirate's reputation among international investors and hamper its ability to borrow in the future. "As we get closer to maturity, investors start ruling out the possibility of restructuring," one banker says. "At this stage, none of the investors factor in any probability of default and they are all waiting for either full repayment at maturity or some sort of restructuring." Unless it turns out that a restructuring deal has been in the works behind closed doors, repayment seems a more likely scenario as time marches on. But if a repayment is coming, neither Nakheel nor the Dubai Government has made assurances that investors will be made whole. Meanwhile, both have other pressing obligations. Dubai's total sovereign debt, including debt incurred by its state-linked companies, has been estimated at $80bn, and much of that is coming due in the next few years. With the slowdown in the property market and the global recession, many Government-controlled companies need money as much as Nakheel does. Dubai's Department of Finance established the Dubai Financial Support Fund last month to administer the distribution of proceeds from the $20bn bond programme and raise more money if needed in the future. The fund's board of directors was appointed last week. Nakheel said in May it was receiving funds under the programme but did not reveal how much. But as the firm and the Government form strategies for paying debts, Nakheel must grapple with other financial issues, including a payment of nearly $300 million this month on a syndicated Islamic bank loan that it took out in August 2007. The $1.85bn loan was structured to give Nakheel a grace period of 18 months in which it would not have to make payments. The first of seven instalments on that loan came due in February, and the second is due on August 29, according to a banker who helped arrange the loan. For Nakheel and for the Government, large payments like these have been coming due at an awkward time, when the financial crisis has made refinancing difficult and raising money in international capital markets a challenge. Ultimately, the success of Dubai's plan to recover from the financial crisis will hinge on its ability to handle large debts without resorting to default or leaving investors anything less than whole, analysts say. And the way Nakheel handles its $3.5bn sukuk is widely seen as a proxy for how investors in the emirate's other struggling firms will fare.