Possible Nakheel default to affect $5.25 billion debt

Investors are waiting to see if the Dubai state-controlled developer will pay the maturing $3.52 billion Islamic bond, known as sukuk, on Monday

Nakheel PJSC’s possible non-payment of its Islamic bond due on Monday will trigger cross defaults on two other securities, bringing the total of affected debt to $5.25 billion, bond documents show.

Investors are waiting to see if the Dubai state-controlled developer will pay the maturing $3.52 billion Islamic bond, known as sukuk. The Dubai government said on November 25 state-run holding company Dubai World is seeking a “standstill” agreement on its debt, including for the Nakheel unit.

The cross default would trigger if “the Nakheel Holdings Group, Nakheel World or the guarantor shall fail to make any payment”, at the expiration of the grace period, the bond documents said. Monday’s deadline is followed by a 14-day grace period to remedy the default and to prevent bondholders from starting legal proceedings.

Nakheel’s other two bonds are a 3.6 billion-dirham ($980 million) floating-rate note due in May next year and a 2.75 per cent $750 million sukuk maturing in January 2011.

“The chances of a full payment at this point are very slim,” said Nish Popat, head of fixed income at ING Investment Management Dubai Ltd. “There is a lack of clarity on how the standstill initiative is progressing. Investors are just waiting and speculating.”

Nakheel’s bond maturing on Monday rose 1 per cent to 53 cents on the dollar on December 11, on speculation that the developer may seek to avoid a default. The bond has dropped more than 50 per cent since the November 25 announcement. Dubai World began talks to restructure $26 billion of debt.

Nakheel’s bond repayment is the biggest maturity for a Dubai entity since the global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc. Nakheel accumulated debt during a six-year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies $70 billion to help diversify its the economy.

BNP Paribas SA and EFG-Hermes Holding SAE analysts said last week Nakheel may repay bondholders as much as 70 cents on the dollar and issue new securities to restructure the remainder of the debt.

While Dubai’s government owns 100 per cent of Dubai World, it hasn’t guaranteed the company’s debt and creditors must help it restructure, Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, said on November 30.