The calculators and spreadsheets are being worked overtime in Dubai, London and New York as holders of the crucial Nakheel 2009 sukuk ponder the US$4 billion (Dh14.69bn) question: will the embattled property company come up with that amount for investors by the December 14 deadline?
Nakheel bondholders will get their first chance to consider their options and agree on a common strategy on Friday, when a conference call organised by Ashurst, the UK law firm advising more than 25 per cent of them, will be held in the afternoon, New York time. The announcement from Dubai World this week that effectively created a "good Dubai World" and a "bad Dubai World" seemed to give an indication of how the firm and its advisers are thinking. Nakheel, and its sukuk, are included among the assets that Dubai World is seeking to discuss with its investors and creditors, and which will be the subject of overall "restructuring".
That would suggest that Dubai World is looking to change the terms of the sukuk, preferably with the agreement of its investors, if that is possible. Unilateral repudiation of the obligation would be a radical step for Dubai World, and for Dubai's ambitions to be the premier financial centre of the Gulf. Trading patterns during the past 10 days, however, seem to suggest that western investors are not taking such an outcome for granted. Some western investors - the hedge funds, arbitrageurs and "vulture" funds that specialise in making a profit from volatile assets in distressed situations - seem to believe there is a good chance of a decent return on the sukuk. For example, New York investment specialists - who in the current cat-and-mouse atmosphere understandably asked not to be named - say that a regular trend is emerging. (While trading in the sukuk is suspended on NASDAQ Dubai, its primary listing, it is still traded on the "grey" and "over the counter" markets in London and New York.)
"Gulf investors sell the sukuk in the evening, local time, we buy them first thing in the morning," said an executive at one New York hedge fund. "It's become a regular routine of the working day." The price has reflected this western interest. From below the 50 cents in the dollar that the sukuk hit when Dubai World announced plans for its standstill on November 25, the price recovered to 61 cents on Wednesday evening.
This is echoed by interest in London. "We want to know if there is value there that has been overlooked in all the recent gloom about Dubai," said an investor from one of the oldest UK hedge funds, which has $15bn under management. Another big international bank is believed to have splashed out $60 million on the sukuk in the past few days. The result of this one-way street in Nakheel sukuk trading is that the proportion of the bond held in the Gulf has declined significantly. Precise ownership by geographical location is almost impossible to gauge with complete accuracy, but Wall Street practitioners estimate between 50 and 70 per cent could be held outside the Middle East.
These figures are important because 25 per cent is regarded as a potentially significant "blocking" stake in the bondholders' meetings that have to be called to agree on a change in the sukuk terms. New York is a rumour mill of possible outcomes. Doing the rounds yesterday was the idea that Nakheel was working on a plan to offer between 70 cents and 80 cents in the dollar, with the balance made up by a new asset-backed bond. Similar figures are known to have been discussed by Dubai World advisers in recent days.
If the big stick on the Nakheel side is the threat of unilateral repudiation, the equivalent for bondholders is the possibility of legal action, by which they could lay claim to Nakheel and Dubai World assets around the world. Legal opinion is still uncertain as to whether, under the terms of the 2009 sukuk prospectus, bondholders have the right to claim assets belonging to other Dubai World group entities, or to the group itself.
The sukuk is formally secured against assets identified at the Dubai Waterfront development just south of Jebel Ali, where Nakheel was planning a project billed as "an entirely new city, twice the size of Hong Kong Island". Work on this project has barely begun, so the assets consist almost entirely of desert land and seashore. The Dubai Government would be very reluctant to hand these assets over to foreign ownership.
Even if bondholders were awarded these assets in a foreign court or other jurisdiction, enforcement is seen as an obstacle by legal experts. Neil Cuthbert, the managing director for the Middle East at the law firm Denton Wilde Sapte, said: "The prospect of litigation against quasi-government companies in this part of the world is difficult. Ultimately, the creditors want to get their money back, and if they can agree to a standstill with a long-term restructuring and perhaps security over some assets, it would be in their interests. A fire sale of assets now would realise perhaps a third of what they paid for them."
Mr Cuthbert said the Nakheel sukuk was governed by English law, so the bondholders had the option of laying claim to assets in the London courts. Again, enforceability would be problematic if they were successful. One possible solution being discussed by Dubai lawyers is for any dispute to be handled by the Dubai International Financial Centre Court. This institution has the advantage of adherence to the Riyadh Convention on reciprocal enforcement, as well as other GCC-wide agreements on legal enforcement. It also has a protocol with the Dubai civil courts governing enforcement of legal decisions.
"It would be very good for the naysayers around the world to hear that the UAE offers world class justice on all matters, including corporate restructuring," said a DIFC official on condition of anonymity. Disputing parties can agree to have the case heard in the DIFC Court; as the Nakheel sukuk is listed on NASDAQ Dubai, it falls under DIFC jurisdiction. Banks owed billions by Dubai World have set up a steering committee of six banks - four British and two from the UAE - to conduct negotiations on behalf of Dubai World's more than 90 creditors, probably advised by the UK accounting firm KPMG. The first meeting between the two sides will take place next week, but these negotiations could run for months.
In contrast, those burning the midnight oil in the Middle East, London and New York have only days to hammer out a deal on the Nakheel sukuk. @Email:email@example.com