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. firstname.lastname@example.org
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