When Nakheel began approaching investors in late 2006 about the possibility of selling Islamic bonds to finance its vast reclamation projects in the Gulf, their response could be summed up in just three words: "Sell us more." Those same investors are perhaps wishing they had kept their mouths shut as they ponder whether Nakheel will repay the bonds when they mature today and, if it does not, how long it will take the company to repay and how much of a discount it may try to negotiate. The possible delays are part of a proposed six-month standstill on repayments at Nakheel, its parent Dubai World and another of the conglomerate's property units, Limitless, as the group tries to whittle down at least US$26 billion (Dh95.49bn) in estimated debt. The prospect of a default at Nakheel upset international markets amid concern that Dubai's efforts to manage an estimated $85bn in debt will end up costing creditors. The apparent decision by Dubai not to pay Nakheel's debt has also sparked a reappraisal of emerging-market borrowers that investors believed could count on government support. Nakheel, which means "the palms", was established in 2003 under Sultan bin Sulayem, the Dubai World chairman, to manage the company's expansion from operating Dubai's ports into building three palm-shaped property developments: Palm Jumeirah, Palm Deira and Palm Jebel Ali. It then turned to creating The World, an offshore development in the shape of a world map. By early 2005, Nakheel had unveiled plans for its most ambitious development yet, Dubai Waterfront. The 12,437-hectare strip of coastal desert would be transformed into a new metropolis twice the size of Hong Kong, it said, becoming home to 1.5 million people. As its centrepiece, Nakheel planned to erect a 1km-high skyscraper, Al Burj. Nakheel's original plan was to raise $2.5bn. It was already a big sum for a company that had been financing its projects one by one; a watershed for an ambitious company that was redrawing Dubai's map with developments visible from space. Rather than being linked to a single project, the sukuk would be sold on Nakheel's own financial strength. Islamic investments were in demand and investors lined up for a piece of Nakheel's offering. By the time the bond's underwriters at Barclays and the Dubai Islamic Bank had tallied the orders, investors had offered to lend Nakheel as much as $6bn. Nakheel settled for $3.52bn, turning its sukuk into what was then the world's largest, just surpassing the $3.5bn raised by DP World that year to finance its controversial purchase of Britain's P&O. Nakheel's bond sale capped a year in which Dubai Islamic Bank was able to sell $9bn in Islamic bonds. But no one seemed to foresee that the boom in property Nakheel relied on would not last. "This town is a vast and vital construction site where prices for well-planned developments will increase for the foreseeable future," said James Wilson, then the Nakheel chief executive, in late 2005. Property in Dubai seemed unstoppable. "People think it is a dream but people are wrong,'' Khaled al Huraimel, then the general manager of Dubai Waterfront, told the International Herald Tribune in 2006. "What we start here, we finish." After falling as much as 30 per cent from their peaks last year, residential property prices in Dubai remain down by about 14 per cent from those highs, data from the Dubai Land Department compiled by reidin.com shows. Nakheel has been forced to put Dubai Waterfront into mothballs. It laid off 15 per cent of its staff in December last year and has continued to shed workers as part of the 12,000 job cuts being made at Dubai World. Investors were also attracted by the returns Nakheel's bond offered. At a time when low US and Japanese interest rates were prompting investors to shift funds to the most distant corners of the world in search of higher returns, Nakheel's bond offered a yield of 6.345 per cent on maturity. Nakheel was by then as well known for its bold financing moves as for its ambitious property plans. It had clinched a $350 million, 10-year Islamic loan in 2004 that was reported at the time to be the largest in the Middle East. The next year it sold $350m in bonds backed by the sale of the residences it was building on Palm Jumeirah, the first such securitisation in the region. The man credited with putting together that deal, Marwan Abedin, is now the executive director the Dubai Financial Support Fund, which last month appointed an accountant from Deloitte to take over Dubai World's restructuring and request the six-month standstill. Along with its yield, Nakheel's bond offered steady capital appreciation in its first year, climbing about 5 per cent. But it dropped in September last year after the collapse of Lehman Brothers touched off the global financial crisis. When the Investment Corporation of Dubai was forced to dip into its own cash last February to help Borse Dubai repay $3.4bn in loans, it plunged even further, to 63.5 cents on the dollar. The first murmurings that Nakheel bondholders might be in for a shock came in April, when the ratings agency Standard & Poor's said it had been informed that Nakheel was examining all available options in handling its outstanding debts. S&P interpreted the statement as casting doubt on Dubai's willingness to support other companies in its stable, prompting it to place its ratings on several Dubai Government-owned companies on review for a possible downgrade. After the Dubai World announcement, S&P and the two other leading ratings agencies, Fitch Ratings and Moody's Investors Service, have cut their ratings for Dubai's big borrowers to below investment grade. If Nakheel fails to redeem its bonds in full today, it will have a 14-day grace period in which it can still pay them off. If it does not, it would be in default of its agreement unless it reaches a compromise with bondholders. Analysts and advisers to Dubai World say Nakheel could offer to pay part of the debt on time and part later on new lending terms. According to the terms of the Islamic bond, Nakheel needs to convene the holders of at least half of the bond's value to vote on any new arrangement, which would have to be approved by at least 75 per cent of this group, representing 37.5 per cent of the debt owed, or $1.32bn of the bonds' face value. What remains unclear is how many of the bondholders support the standstill and how many oppose it. One New York-based group of creditors headed by a US hedge fund claims to represent enough of the bondholders to block any new deal and has threatened to pursue legal remedy. Nakheel's bond was guaranteed by Dubai World. To comply with the requirements of Islamic finance that every loan be connected to the purchase of some real asset, Nakheel's $3.52bn sukuk was backed by the Dubai Waterfront property. Investors would lend the money to three special-purpose vehicles that would buy the land from Nakheel. The company would use the money to finance its operations and then, using its earnings, would pay back the bond and buy back the land under Dubai Waterfront. It is not clear, however, whether the three investment vehicles, Nakheel Development 1, 2, and 3, still have title over Dubai Waterfront. warnold@thenational.ae
