Nakheel's $16bn bond faces test

New Islamic bonds from Nakheel will face a test today in a debt auction amid falling prices and rising yields since trading began two weeks ago.

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The Dubai property giant is issuing the Islamic bonds, or sukuk, as part of a US$16 billion (Dh58.76bn) financial restructuring it began putting in place late last month.

The sukuk initially yielded about 13 to 15 per cent, well below what many observers expected. Yesterday, however, the security was yielding 16.37 per cent, according to a major bank trading the sukuk. But a bigger gauge of demand will come today when a group of banks has reportedly been invited to bid on Dh320 million worth of the sukuk.

Yields move inversely to prices, and higher yields reflect a heightened investor perception of risk.

Nakheel expects to issue about Dh4.8bn of sukuk shares to contractors who were not paid for work after the property crisis hit the company's business. It issued a first instalment of Dh3.78bn last month. The sukuk pays a 10 per cent annual return over five years.

Chavan Bhogaita, the head of markets strategy at National Bank of Abu Dhabi, said many contractors receiving the Nakheel sukuk would offload them quickly, even at a loss. Contractors have already been paid 40 per cent of their claims in cash under the terms of Nakheel's restructuring, meaning losses on the sukuk sale would not cut too deeply.

"It makes sense to sell at current levels as it takes the contractors' aggregate recovery on Nakheel receivables to close to 90 per cent - 40 per cent of their claims already received in cash plus the remaining 60 per cent in sukuk, monetised at circa 80 cents on the dollar," he said.

Contractors, he said, were also looking to build up cash, given the global economic uncertainty.

Then, he said, there was the psychological factor.

"Most of the contractors have already been on a roller coaster ride with Nakheel for a prolonged period and hence being able to exit this situation and have zero risk or uncertainty carried forward is in itself attractive," he said.