By John Bates, Head of Fixed Income at Silk Invest.
“The existence of forgetting has never been proved: We only know that some things don’t come to mind when we want them.” ~ Nietzsche
6 months after Nakheel’s Sukuk hit the mid-30s level, a new Islamic bond is being chalked up for launch in June/July this year. Some may think that the dust has not yet settled on Nakheel’s recent turbulent ride.
The new issue makes perfect sense for Nakheel and should not be viewed as a bombshell by the markets. It follows prior announcements and forms part of the wider Dubai World (DW) restructuring. Note also that existing debt is now trading above the 100 level on the promise of a repayment in full; the DW restructuring (Nakheel’s ultimate parent) is proceeding broadly according to plan, and no default has occurred. Additionally, the Dubai Electricity and Water (DEWA) bond issue 2 weeks ago, albeit not connected to DW, proved that investor sentiment may have been scratched but is far from hurt: that $1bn bond was 11.8 times over-subscribed!
On closer inspection the new Sukuk, which at the moment is not officially confirmed, is structured to accommodate Nakheel’s trading partners, and is conditional on the trade creditors representing at least 95% of the value of all claims agreeing to the proposal. The Sukuk are rumoured to have a 5 year tenor and a profit distribution (or de facto coupon) of 10%. This follows the announcement in March that trade creditors would receive 100% recovery of their claims, split 40% cash and 60% in the form of a publicly tradeable security. For the next financial reporting period the company has c. $8bn of unpaid accounts payable and accruals.
CONCLUSION
The impact of all of this is that creditor banks are likely to demand a higher interest (or profit) rate on their restructuring than the 1% offered to them (and rejected) last week. Additionally, the 10% being offered to trade creditors on the 60% non-cash element of the restructured claims will allow most creditors some headroom on their own provisioning levels, and for this reason the deal is likely to be well-received by trade creditor and the market as a whole.
All in all the restructuring is proceeding in a market-friendly and thankfully relatively transparent fashion. We believe fixed income investors adopted have moved on from the pain of 6 months ago and are looking to find value once again. This is illustrated in Nakheel’s 2011 Sukuk (which we no longer hold) which is currently trading at 103 cents on the dollar. See the attached chart for a picture of the roller coaster!
For us as investors, an issue which can go from 87 to 37 then to 103 in the space of 5 months deserves a special place in our memories!
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