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Investors bet on Nakheel payoff |
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August 18 2009
Nakheel bonds rose to their highest price in more than a year this week
as speculation increased that the Dubai Government-controlled developer
will repay a US$3.52bn (Dh12.93bn) debt due in December.
Investors in Nakheel’s $3.52bn Islamic bond could profit handsomely if the company pays off the debt as scheduled, analysts say.
Repayment
of the sukuk, which has emerged as one of Dubai’s biggest financial
challenges, is becoming increasingly likely as time goes on.
A
restructuring of the debt has long been rumoured, but with the start
this week of Ramadan, typically a slow period for investors and
markets, Nakheel is running out of time.
“The window for a
friendly organised restructuring is closing rapidly,” said Abdul Kadir
Hussain, the chief executive of Mashreq Capital. “At that point you’re
left with one of two options, which are a full repayment or the one
none of us want to conceive of, which is potentially a default. And I
think it’s still highly unlikely that there would be any outright
default.”
Nakheel, the developer of -Dubai’s palm-shaped
islands, has been forced to delay projects and cut jobs after property
prices in the emirate dropped as business activity slowed and lending
stalled because of the financial crisis.
Nakheel’s sukuk price
started to fall last September, dropping 38 per cent to a low of 63.5
cents in February. As with other bonds, those falls reflected increased
worry that Nakheel would default on the debt. It also pushed up the
sukuk’s yield, or the returns new investors could expect if the bond
were to be repaid in full.
In the past month, however, investors
appear to have grown much more optimistic about being paid back. The
sukuk’s price has risen by 46 per cent since its lows in February,
while its yield has fallen by 28 per cent in a month, reflecting
increased confidence of a repayment that will leave investors whole.
As
a consequence, those who invested when prices were low and yields were
high in February, March and April could stand to make substantial
profits if Nakheel does pay off the bond, whether it raises the money
from a syndicate of banks or finances repayment through its parent
-company, -Dubai World. The company is set to pay back the bond at 115,
or 15 per cent above par, meaning investors who bought when it was
close to 60 would earn a return of about 90 per cent.
“The guys
who were able to buy the sukuk at its lows in March and April would
have pretty much doubled their money,” Mr Hussain said. “But even today
this thing is trading in the low 90s, so if you buy this in the 92 to
93 price range and get paid 115 in four months, that’s a 40 or 50 per
cent yield on an annualised basis. That’s still very attractive.”
The
sukuk does come with risks attached, however. As its December maturity
approaches, Nakheel has to juggle other obligations, including a
payment of nearly $300 million this month on a syndicated Islamic bank
loan it took out in 2007. It will have to pay another instalment on
that loan next February. Another Dh3.6bn sukuk comes to maturity next
May.
How Nakheel and Dubai World handle these debts is widely
seen as indicative of how the Dubai Government will address its overall
debt load, which has been estimated at $80bn, incorporating the
borrowings of state-linked companies.
The emirate may finance
these debts partly by tapping a bond programme it launched in February
in which it is borrowing $20bn in two tranches. The first $10bn came
from the Central Bank, and the second $10bn may come from the Central
Bank, international investors, or a combination of the two. Nakheel
said in May that it was receiving funds from the programme, but did not
reveal how much.
Source: The National
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