Nakheel a 'litmus test for Dubai's credit rating'

'What happens at Nakheel will affect the six ratings that we have in Dubai,' says analyst as the developer seeks to refinance $3.5bn.

DUBAI-SEPTEMBER 9,2008 - NAKHEEL signage along Sheikh Zayed road in Dubai. ( Paulo Vecina/The National ) *** Local Caption ***  PV Nakheel4.JPGPV Nakheel4.JPG
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DUBAI // The refinancing of Nakheel's US$3.5 billion (Dh12.85bn) Islamic bond will be the litmus test for how credit ratings agencies assess Dubai government-controlled companies, a senior Moody's analyst said yesterday. Nakheel, the developer of Dubai's Palm Islands, is seeking to refinance the bond this year, an exercise that is being closely monitored by credit rating agencies.

"What happens at Nakheel will affect the six ratings that we have in Dubai," said Philipp Lotter, the senior vice president of corporate finance at Moody's Investors Service. "It's a highly strategic company that, from our view, does not have the stand-alone capacity to repay this bond. This leaves one question open: how will this bond be addressed in December?" In April, Standard & Poor's put six government-related companies on possible credit downgrade because of uncertainty about whether the Government would pay all their debt obligations, after it emerged that Nakheel was seeking to restructure its bond. Those companies were DIFC Investments, DP World, Jebel Ali Free Zone, the Dubai Multi Commodities Centre Authority, Dubai Holding Commercial Operations Group and Emaar Properties.

Dubai has successfully refinanced the debt issued by several of its companies this year, but Nakheel faces a much greater test in solving its debt problems because of its exposure to the property sector, especially high-end, off-plan homes, Mr Lotter said. "The difference between Nakheel and these businesses here is that they may have been subject to a liquidity squeeze, but at the end of the day they are going to come out with a legitimately good business," he said. "The degree of restructuring at Nakheel that will be needed to turn this company into a viable entity in 2009 will be far greater than any other company."

A Nakheel spokeswoman said yesterday the developer was adapting to the changing market. "We have adjusted our immediate business objectives to accommodate the current economic climate," she said. "This has resulted in us redirecting activity around some of our projects, while other projects will continue as planned. Our projects are planned for the next 10 to 20 years and we continue to develop in a responsible manner."

Mr Lotter said he believed the Dubai Government would intervene because, if Nakheel defaulted on the loan, it would affect the emirate's ability to obtain financing. Nakheel has already said it was receiving funds out of the $10bn pool raised by the Dubai Government in a bond issue sold to the Central Bank, but it has not disclosed how much. Nakheel had the option of raising additional funds through a share sale, but the global financial crisis and the property downturn has made that an unlikely option. Sukuk holders have the option of buying Nakheel shares at a 5 per cent discount should it go public.

One option for Nakheel would be to pay off the entire sukuk with funds received from the Government. But the developer and its parent company have been making efforts to cut costs and raise more cash, which may indicate that it requires additional funds to those already pledged. Nakheel said yesterday it was "considering all options and any announcement would be made ahead of the maturity date later this year".