Deep concern about the health of Nakheel's business has slowed the development of a market for the Dubai property giant's Islamic bonds, traders say.
Nakheel issued a first tranche of the Islamic bonds, or sukuk, to unpaid contractors last month. They are a key part of the company's restructuring.
In a prospectus attached to the sukuk, Nakheel revealed that it wrote down the value of its property and project portfolio by almost Dh74 billion (US$20.14bn) in 2009 as its fortunes flagged. The company also said it changed tactics in response to the financial crisis, forging ahead with a selection of its projects and putting others on hold.
Given its continued stresses, some observers are worried about how Nakheel will generate cash to pay scheduled 10 per cent annual returns on the sukuk each year - and then pay the principal back after five years. Nakheel executives estimate the company will issue Dh4.8bn of sukuk shares to contractors.
The absence of a sovereign guarantee only adds to the uncertainty, said Serge Lioutyi, an emerging markets credit analyst at Citigroup in London who has been following the situation closely.
"They have at least Dh4.8bn in sukuk to pay off in five years and more than $2bn of bank debt, and the interest payments aren't small," he said. "From an investment point of view there's no sovereign guarantee and you have to price that in."
The few times sukuk shares have traded so far, people familiar with the deals say prices have been from 75 to 85 cents on the dollar. That equates to yields of about 13 to 15 per cent, they say, or slightly higher than yields on debt issued by Dubai Holding. Heightened yields mean investors perceive the debt as risky.
Because Nakheel is under more financial pressure than most peers, observers have said they do not expect distressed-asset investors to buy the sukuk until prices drop further and yields climb higher. And with a growing higher-yielding debt in the US and other developed markets, they say the relative attractiveness of Nakheel has dimmed.
