Holders of the Nakheel sukuk, which matures tomorrow, are braced for a decision by Dubai that could see them be offered less than the value of their investments in the US$3.5 billion (Dh12.85bn) issue. And a senior banker has warned that Dubai faces harsher credit terms and a possible liquidity squeeze if its financial problems are not resolved.
Advisers to Dubai World, the conglomerate that owns Nakheel, still say it is possible that the sukuk could be repaid in full, as one of a series of options senior government officials are considering. With the profits due to bondholders, the total owed by Nakheel is more than $4bn. A key adviser, who spoke on condition of anonymity because of the sensitive nature of the issue, said: "They could pay it in full or they could default, but there are a whole range of options in between. Bondholders could be offered a partial cash redemption with a new bond to make up the difference."
Although the prospectus deadline for the repayment is the end of tomorrow, Nakheel has a 14-day grace period for payment or agreement on alternative terms. The "grey market" price of the Nakheel sukuk, which is the unofficial price as trading is suspended on its primary market NASDAQ Dubai, rose towards the end of trading last week, with trades reported at 56 cents in the dollar level after having been below 50 cents earlier in the week.
Two banks, BNP Paribas of France and EFG Hermes of Dubai, suggested that bondholders could expect a cash payout of about 70 cents, with the offer of a new bond for the balance. "Such an outcome would be beneficial for both parties involved," Fahd Iqbal, an analyst for EFG who is based in Dubai, 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 governmentrelated parties, would have continued access to capital markets."
BNP Paribas said: "A default scenario is unlikely." In New York and London, where analysts say most of the Nakheel bonds are now held, hedge funds and arbitrageurs who bought into the sukuk at comparatively low prices are weighing their options. They have received legal advice that they have no recourse to assets in the wider Dubai World group. The sukuk is secured on property originally intended for development as Nakheel's Waterfront project, which has now been halted.
Some have considered legal action against Nakheel advisers on the grounds of alleged mis-selling, but lawyers believe there would be problems with having Dubai courts enforce a decision. Bondholders outside the Gulf region are being represented by a steering committee headed by the US hedge fund QVT Financial, which has declined to comment. One New York hedge fund said: "We don't expect to get much via the legal route but we have to go through the process. If we are not happy, we will try to make it as difficult as possible for Dubai to get finance on good terms."
Another option being discussed by financial advisers is the possibility of a "two-tier" settlement, with Gulf bondholders agreeing to different terms from those offered to international investors. Rasameel, a Kuwaiti hedge fund with Islamic finance expertise, is reported to be organising regional bondholders. International bankers are already warning that borrowing will become more expensive. Banks operating in the region are expected to lower the risk of their investments and make less credit available at higher prices after the Dubai World restructure announcement, a senior banker at Barclays said.
"You will see banks continue to review their risk appetite," said Michael Miebach, the managing director of Barclays retail and corporate business for MENA. "People will see a rise in credit risks and borrowing will be more expensive." This will also make borrowing more expensive for local banks, many of which have heavily relied on syndicated loans from foreign banks, and bonds to a lesser degree. And three key local banks - Mashreqbank, Emirates NBD and Dubai Islamic Bank - have had their credit ratings downgraded by two agencies.
A lower rating implies a higher likelihood of default and makes it more expensive to raise money. "The risk appetite has to be reviewed in the light of the events in recent weeks," Mr Miebach said. "In times when credit becomes scarcer, credit will be priced up and eventually reflected in banks' pricing. It is a risk-based approach." Mr Miebach also warned of a repeat of last November, when Dubai's banks faced a liquidity crisis after foreign banks pulled Dh180bn out of the country following the collapse of Lehman Brothers. Interbank rates rose above 4 per cent, causing a squeeze on liquidity.
"Liquidity in the market could be impacted - we have already seen it this year and that will be a likely scenario," Mr Miebach said, adding that there could also be a new wave of job losses. @Email:email@example.com firstname.lastname@example.org