$1bn sukuk already trading at a discount

Nakheel's Islamic bond is already trading at a big discount to its face value, illustrating continued concern about the property giant's finances.

Nakheel's new Islamic bond is already trading at a discount to its face value, underscoring investors' continued doubts about the embattled property giant's finances.

The palm islands developer issued the Dh3.8 billion (US$1.03bn) Islamic bond, or sukuk, yesterday as part of its financial restructuring. The sukuk shares went to contractors who were not paid their dues after Nakheel's business experienced difficulties following Dubai's property slump.

Ahmad Alanani, a senior executive officer in the fixed-income department of Exotix in Dubai, said retail buyers were snapping up shares from contractors at about 84 cents on the dollar, sending yields skywards. Many cash-strapped contractors are expected to sell their shares immediately, even though the sukuk returns 10 per cent a year.

"As soon as the retail guys are out it's going to trade lower and lower," he said, predicting prices could drop to 70 to 80 cents on the dollar.The Nakheel sukuk is currently yielding slightly above the debt of other companies linked with the Dubai Government, including Dubai Holding and the Dubai International Financial Centre. But Mr Alanani and other traders say Nakheel is under greater financial strain than its peers, which bodes ill for prices. Yields move inversely to prices.

Ali Lootah, Nakheel's chairman, announced the long-awaited sukuk issuance on Wednesday.

It was the culmination of a Dh60bn restructuring that Nakheel, Dubai's biggest state-owned property developer, laid out last March. Under its terms, the company paid contractors with verified claims against it up to Dh500,000 each in cash. Those owed more than that were to be given 60 per cent of the remainder in sukuk shares.

As it settled with contractors, Nakheel reached a deal with banks in May to extend maturities on about Dh8bn of loans. It has also been transferring customers who invested in its stalled projects into ones earmarked for completion, a process that is about 60 per cent complete, Mr Lootah said.

To support the restructuring, the Dubai Government has injected about $8.6bn into Nakheel, all of which has been converted into equity.

With the bank-debt restructuring complete, the sukuk was the final piece in the restructuring puzzle. It suffered numerous delays after an initial announcement that it would come by late last year or early this year. A further announcement said it would come in the second quarter. When the company missed that target, speculation grew that it might not happen until next month.

Yesterday's release of a first Dh3.8bn sukuk tranche put that talk to rest. Nakheel may issue an additional Dh1bn worth of sukuk shares as more contractors' claims are verified, executives said on Wednesday.

The issuance comes amid a rough market for Dubai-linked debt. The bonds of several companies based in Dubai are yielding in excess of 10 per cent, and Dubai's Mashreq Capital is projecting yields on the sukuk to settle at above 20 per cent.