Buy Nakheel's Islamic bonds, JPMorgan advises clients

JPMorgan Chase is advising clients to buy Nakheel'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.

Nakheel's Dh4.27 billion of sukuk yielded 9.88 per cent at Monday noon in Dubai, down seven 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 property debt.

Nakheel will manage to pay or refinance as much as half of the US$3 billion of debt due in 2016 as it generates at least $1bn 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."

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 $8bn of cash from the government since announcing a standstill agreement with creditors in 2009, JPMorgan said.

The property industry in Dubai has started recovering from a crash that sent prices plunging more than 65 per cent. 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.

* Bloomberg News