x Abu Dhabi, UAEMonday 22 January 2018

Debt traders eager for bonds Nakheel gives to creditors

Nakheel's probable $3.2bn sukuk issue to contractors owed money means bonds are likely to be sold on at a significant discount in market by firms that receive them.

Investors and debt traders are planning their strategies to pick up new Nakheel Islamic bonds at discounts of up to 40 per cent when they are issued to trade creditors in the next three months.

Nakheel revealed last year that it would issue as much as US$3.2 billion (Dh11.75bn) of five-year bonds with a 10 per cent annual return to contractors who were owed money. The contractors would receive 40 per cent of their agreed-upon debts in cash.

Most of Nakheel's contractors will be eager to sell the sukuk on receipt to get much-needed cash into their businesses, analysts said.

Ziad Shaaban, the head of fixed income at the Egyptian bank EFG-Hermes, said he expected the market to price the new Nakheel sukuk at rates similar to outstanding sukuk to Emaar Properties and Dubai Holding.

"We have already had a few conversations with some of these contractors," he said. "They need the money, so I don't think many of them will be willing to go down a lot in the price. There are a lot of buyers just waiting for this thing to come out."

Other traders at major banks in Dubai said they were confident they could squeeze more value from contractors because of their desperate need for cash.

"Some sellers just need working capital and will be happy to liquidate so they can carry on with their business," said one trader, who declined to be identified. "I think they will trade somewhere in the range of a 40 to 50 per cent discount to start off with and go up from there."

Hedge funds, international bank trading desks and private investors were already building up their contractor contact list to move quickly once sukuk are distributed, the trader said.

Khalid Howladar, a senior credit officer at Moody's Investors Service, said contractors would be less likely than investors to take the risk of Nakheel not paying the bonds off after five years.

"Given that the holders will be tradesmen and contractor companies, and that many of them are in need of liquidity, there is a lot of potential for different prices for the sukuk," he said.

However, any issuance still hinges on Nakheel receiving a level of creditor support for the plan equal to 95 per cent of what it owes. As of the company's latest announcement last month, it had 91 per cent of the value of claims signed on.

The issuance is expected to give a jolt to the region's Islamic bond market, more than two years after the global financial crisis.

There were signs of a pickup in activity in the final quarter of last year and the beginning of this year. The HSBC/NASDAQ Dubai UAE US Dollar Sukuk Index climbed to 131.15 on January 4, its highest since HSBC started tracking its performance in January 2005, according to Bloomberg.