Nakheel Early Payment to Bolster Soaring Sukuk: Islamic Finance

Jan 06, 2014 2:47 am ET

(To be sent this column, click here. For more credit- market news, TOP CM.)

Jan. 6 (Bloomberg) -- Nakheel PJSC’s plan to pay more than $1 billion of bank debt early may herald further gains for the Dubai real-estate developer’s Islamic bonds.

Mashreq Capital DIFC Ltd. and Quantum Investment Bank Ltd. said Nakheel’s payments might help extend a rally that saw its sukuk yield tumble 215 basis points in the past 12 months to a record 6.58 percent Jan. 3, according to data compiled by Bloomberg. That compares with a 10 basis-point increase to 4.92 percent for Middle East Islamic bonds, according to JPMorgan Chase & Co. indexes.

Nakheel, which had to be bailed out by the government after the credit crisis triggered one of the world’s worst real-estate crashes, said Jan. 4 it will bring forward payments as it benefits from a recovery in Dubai property prices. Knight Frank LLP, an independent global real estate consultancy, expects values in the emirate to rise 10 to 15 percent this year, the most in the world.

“Investors weren’t expecting this and it’s very good news,” Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment, said by phone yesterday. “The prepayments for this year represent almost half of Nakheel’s bank debt and will give them many options, including the ability to refinance.”

‘Strong Message’

Nakheel will pay 2.35 billion dirhams ($640 million) in February, 15 months ahead of schedule, and a further 1.65 billion dirhams in August, Chairman Ali Rashid Lootah said at a press conference. The company’s Islamic bond due August 2016, which at face value pays a profit of 10 percent a year, rose to a record of 108.16 cents on the dollar Dec. 26.

“There is potential for further outperformance from the bond, particularly on the back of this news,” Abdul Kadir Hussain, who oversees about $700 million as chief executive officer at Mashreq Capital in Dubai, said by phone yesterday. “The company has sent a strong message” to lenders, he said.

Nakheel said in June that it would seek to extend the maturity of its bank debt to 2023 from 2015, and improve borrowing terms.

Slowdown Vulnerability

The Islamic bond, which complies with the religion’s ban on interest, totals about 4.4 billion dirhams and was issued to trade creditors as part of measures to delay more than 27 billion dirhams of debt. Nakheel’s profit for the nine months ended Sept. 30 was 1.77 billion dirhams, up from 1.12 billion dirhams a year earlier, the company said in an Oct. 7 statement.

The company’s success relies heavily on the booming Dubai property industry and Nakheel is exposed to a downturn, according to Hussain. A bubble could be forming in the United Arab Emirates real-estate market, Sachin Mohindra and Sherif Salem, portfolio managers at Abu Dhabi-based financial services company Invest AD, said in a report this month.

“A fair amount of Nakheel’s income is from straight forward property development,” Hussain said. “If there was an immediate slowdown they would be vulnerable.”

‘Tight Levels’

The company wrote down the value of its assets by $21 billion over about two years after Dubai property prices tumbled more than 65 percent from their mid-2008 peak. The developer avoided default with $8.6 billion from Dubai’s government. Nakheel now has more then 3,500 units with an estimated sale value of 10 billion dirhams in development, it said in a statement Jan. 4.

Real estate prices in Dubai increased more than 20 percent in 2013, faster than anywhere in the world, Knight Frank said in its Prime Global Residential Forecast.

“Management’s announced intention to prepay Nakheel’s bank debt should definitely be supportive for the sukuk’s price,” Gus Chehayeb, a Dubai-based research director for the Middle East at Exotix Ltd., said by phone yesterday. “Although it would be surprising for the yield to fall much further from its currently tight levels.”

Lootah said Jan. 4 the company won’t have any problems paying back its other bank debt or the sukuk. A spokeswoman for Nakheel declined to comment when contacted by phone yesterday.

--Editors: James Doran, Claudia Maedler