Nakheel Possible Default to Affect $5.25 Billion Debt

Nakheel Possible Default to Affect $5.25 Billion Debt

Dec. 13 (Bloomberg) -- Nakheel PJSC’s possible non-payment of its Islamic bond due tomorrow will trigger defaults on two other securities, bringing the total of affected securities 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 Nov. 25 that state- run holding company Dubai World is seeking a “standstill” agreement on its debt, including for the Nakheel unit.

The default would be triggered by failure of Nakheel or the guarantor, Dubai World, to make payment at the end of a grace period, the documents said. Nakheel has two weeks to remedy a default and 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 and a 2.75 percent, $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.”

Avoiding Default

Nakheel’s bond maturing tomorrow rose 1 percent to 53 cents on the dollar on Dec. 11, on speculation the developer may seek to avoid a default. The bond has dropped more than 50 percent since the Nov. 25 announcement. Dubai World began talks with banks this month 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.

The 2009 sukuk redeems at $115.52, increasing the Nakheel’s total payment to $4.1 billion. The amount includes a 6 percent premium to bondholders in case the developer is unable to do an initial public offer during the life of the bond, and the remaining part of the annual coupon.

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.

Debt Restructuring

“Such an outcome would be beneficial for both parties involved,” EFG’s Dubai-based strategist Fahd Iqbal wrote in a research report. “Creditors would receive a portion of their money back with a promise for the remainder to be delivered at a later stage while Dubai World, along with other government- related parties, would have continued access to capital markets.”

While Dubai’s government owns 100 percent 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 Nov. 30. Dubai World may need more than six months to complete its debt restructuring, Al Saleh told the Al Arabiya TV channel on Dec. 8.

Nakheel, the developer of palm-tree shaped islands off the Dubai coast, had a first-half loss of 13.4 billion dirhams as real-estate prices crashed in the Gulf business hub.

“Certain of the Nakheel Group’s financing arrangements may contain cross-default clauses whereby a default under one of the Nakheel Group’s financing arrangements may constitute an event of default under other” obligations, according to an offering circular for the Nakheel 2011 bonds on Bloomberg.

Nakheel’s 2.75 percent bonds due January 2011 were unchanged at 46.50 cents on the dollar Dec. 11. Prices for the $750 million notes have dropped from 88.37 cents on the dollar on Nov. 24.

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