Nakheel settles Dh4.4bn bank debt

Wayne Arnold

• Last Updated: October 19. 2009 10:06PM UAE / October 19. 2009 6:06PM GMT

Dubai and the companies it controls are taking advantage of a rally in global markets to pay off loans and seek cheaper funds from international investors as the emirate tackles its US$85 billion (Dh312.16bn) debt burden.

The Government of Dubai yesterday invited investors to attend a round of fund-raising presentations starting on Thursday in Europe, Asia and the UAE. The last time Dubai raised funds from international investors was in April last year.

In another positive sign, Nakheel, the heavily indebted developer owned by Dubai World, repaid Dh4.4bn in debt to banks last week.

Nakheel’s ability to repay has become a bellwether of Dubai’s ability to manage its debts in the wake of the global financial crisis. Investors have feared that Nakheel, best known as the developer of Dubai’s iconic palm-shaped islands, may not be able to pay $4.02bn to settle an Islamic bond that comes due on December 14.
But Nakheel’s early repayment of the Dh4.4bn debt bolstered confidence that the firm would repay the larger bond on schedule.

“This is an encouraging sign for bond holders,” said Chavan Bhogaita, the head of credit research at the National Bank of Abu Dhabi. “There have been ongoing concerns about Nakheel’s ability to meet its financial obligations, and now we find out that Nakheel has paid back what is not an insignificant amount of money. Sentiment is certainly moving in the right direction.”

Analysts say Dubai and other emerging-market borrowers are taking advantage of a revival in investor appetite for riskier investments. Signs of a global economic recovery and declines by the US dollar are prompting investors to borrow dollars at low interest rates and invest them in Latin America, Asia and the Gulf. The resurgence of these funds has created a boom in demand for corporate bonds, filling a gap in funding left as banks struggle to recover from the crisis.

Market participants expect Dubai to use any new money raised overseas to refinance a $1bn Islamic bond which matures on November 4 and was taken out by Dubai’s Department of Civil Aviation. The department could not be reached for comment.
An official at Dubai’s Department of Finance said the meetings were not linked to a $20bn bond programme in which the emirate is borrowing money to inject into struggling government-controlled companies such as Nakheel. The first $10bn was disbursed this year and Dubai has said it plans to sell the second $10bn before the end of the year. Analysts expect Dubai to raise the second tranche next month with the help of the Central Bank, which bought the first $10bn of bonds.

“The Government of Dubai would like to clarify that the investor meetings announced this morning are completely independent of any ongoing discussions with regard to the second, $10 billion tranche … of the support fund,” the official, who declined to be identified, told Reuters.

Nakheel last Thursday repaid Dh4.4bn in six-month commercial notes it sold in January to a trio of UAE-based banks – Emirates NBD, Mashreqbank and Noor Islamic Bank – and Samba Financial Group of Saudi Arabia. Faced with a shortage of cash, the developer reportedly negotiated with bankers to extend the maturity of the notes to November 15. It then elected to settle the debt a month early.
“Perhaps it wanted to generate some goodwill,” said Mohammad Rajid Kamran, the deputy general manager and head of global financial institutions at Emirates NBD. Nakheel officials declined to comment.

In July, Dubai established a Financial Support Fund to oversee the distribution of the proceeds from its bond programme, some of which Nakheel has said it used to help pay contractors and creditors. The price of Nakheel’s bonds has since risen, indicating greater investor confidence in the company’s ability to repay the debt.

The price of Nakheel’s sukuk rose nearly 2 per cent yesterday. The news comes on the back of last week’s sale of a $1bn sukuk by Abu Dhabi’s Tourism Development and Investment Company (TDIC). The TDIC sukuk was the largest Islamic bpnd sold to date by a GCC-based issuer.

“The announcement that Dubai is holding a road show to tap the market coupled with the news that Nakheel repaid a syndicated bond early on is definitely giving a positive undertone to the market,” said Mohieddine Kronfol, the managing director at Algebra Capital.

Dubai World has an estimated $5.5bn in loans outstanding but also has to worry about slightly more than $24bn owed by its many units, part of what the company has said are $60bn in consolidated liabilities. Nakheel accounts for $7bn of that, including its Islamic bond, or sukuk.

* with Reuters
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