Nakheel sukuk yields jump with concern over debt refinancing

Nakheel's sukuk yields spiked yesterday to more than 10 per cent, as the developer discusses its options on how to refinance its upcoming debt repayments.

Nakheel is likely to find easier borrowing conditions in the syndicated loan markets and has a number of assets such as Dragon Mart, above, that can be secured as collateral. Paulo Vecina / The National
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Nakheel's sukuk yields spiked yesterday, as the developer discusses its options on how to refinance its upcoming debt repayments.

Yields for the developer of Dubai's man-made islands on its Islamic bonds maturing in 2016 hit their highest level since November last year. They had spiked 272.3 basis points to 10.2 per cent since May 22, when the US central bank chairman Ben Bernanke first discussed the possibility of rolling back the country's quantitative easing policy.

Bond yields move in the opposite direction from prices. Nakheel disclosed in February that it was in talks to extend a Dh8 billion loan which falls due in 2015, but reports published yesterday suggested it was talking to banks about a potential bond sale.

When contacted by The National yesterday a Nakheel spokeswoman confirmed only that the company was still in talks with banks to extend the loans

Analysts said investors were responding to a lack of information over progress with the company's refinancing discussions with lenders.

"There was a bit of a panic sell falling across the Dubai Inc spectrum, not just Nakheel," said Ahmad Alanani, the senior executive at Exotix, a boutique investor in illiquid debt.

"With that in mind, there are a lot of fundamental weaknesses in Nakheel as a credit in its own right … we don't know how much progress the company has made in trying to refinance its debt."

However, Nakheel was likely to find easier borrowing conditions in the syndicated loan markets and had a number of assets such as Dragon Mart and Ibn Battuta Mall that could be secured as collateral, Mr Alanani added.

"The picture in the syndicated loan market is actually a bit better than in capital markets," he said. "It's not prone to day-to-day volatility since seen in the bond market."

The company, which was part of the Dubai World conglomerate that spooked financial markets in 2009 when it asked creditors for a debt repayment standstill, has another US$3bn worth of bank debt and sukuk due to mature in 2016.

In January, Exotix cut Nakheel's sukuk bonds to "sell", saying that it thought it was "highly unlikely" that Nakheel would be able to pay the principal on the notes from its own capital when they fell due.

Abu Dhabi's government bond yields have risen sharply since Mr Bernanke first discussed tapering bond purchases, with the emirate's 10-year bonds maturing in 2019 rising 79 basis points to 2.57 per cent.

"Because US treasuries are the ultimate benchmark, the pricing of everything else is going to move as well," said Giyas Gokkent, the chief economist at National Bank of Abu Dhabi. "Yields have gone up but they've come down from higher levels."

The recent sell-off may have hurt bond investors, but borrowing costs have returned to about the same levels as recently as nine months ago, meaning most issuers would have few difficulties selling new debt if they needed, he added.

Funds tracking the HSBC/Nasdaq Dubai UAE US dollar sukuk index have lost money this year, with total returns down 2.7 per cent year to date.