Dubai's Nakheel Offers to Pay $8.2 Billion to Creditors by July

EDITION MAIN PAGE | Commercial Real Estate

UPDATE: Dubai's Nakheel Offers to Pay $8.2 Billion to Creditors by July

Posted by Alex Finkelstein 04/27/10 12:15 PM EST
Author Bio | Archives
Related Stories:

Nakheel, one of Dubai's biggest real estate developers, plans to offer its trade creditors a 10 percent return on an Islamic bond, as Dubai tries to free stalled bill payments and kick-start its economy, according to two Mideast business news publications.

Several creditors today began signing settlement agreements with Nakheel, according to Menafin.com and Maktoob Business.

Nakheel has promised to pay a total $8.2 billion to creditors by July.

In Dubai's $9.5 billion rescue plan unveiled last month for Nakheel's parent, state-owned Dubai World, Nakheel offered to pay suppliers and contractors 40 percent in cash and 60 percent in a tradable security.

The 10 percent return is a starting point for negotiations with trade creditors of Nakheel, internationally known for its artificial islands built in the shapes of palm trees and a map of the world.

"It is a positive move because now there is something tangible for trade creditors to look at and consider," Mark Blanksby, partner (construction and engineering) at the legal firm Clyde & Co., told the publications.

"Our clients had received the agreements on different dates last week."

The Mideast publications note Nakheel's offer is generous, especially in light of Dubai World's opening offer to bank lenders of just 1 percent on two new tranches of debt maturing in five and eight years.

The Nakheel offer is a sign of the trade creditors' dominant position in debt talks, industry sources say.

"It's about the importance of the real estate sector to the economy," Dubai real estate sources told the publications.

"If Nakheel doesn't succeed, what would happen to real estate in Dubai?"

The government is placing "a great deal of importance on trade creditors because if they do not receive cash, it will put pressure on construction and real estate markets, which will affect workers at the firms and hurt the overall economy," according to persons in a position to know.

"Trade creditors at Nakheel weren't really paid for a very long time. And they're local," another person familiar with the matter told the publications.

"If you pay international banks, the money goes to London. If you pay the trade creditors, the money stays in the economy and maybe kick-starts it again," says a source close to the negotiations.

Khuram Maqsood, managing director at Emirates Capital, told the publications the company's suppliers and contractors were vital to the continuation of Nakheel's business, unlike bank lenders, which are trying to reclaim funds already committed.

"They're arguably in a weaker negotiating position with their vendors and therefore they're prepared to be more generous with them in order to get to agreement," Maqsood says.

"The future liability of their business is very much a function of their vendors coming through with completing their services."

Dubai World bank lenders are unhappy with the 1 percent offered in the restructuring proposal and are expected to use Nakheel's offer to trade creditors as leverage to negotiate for a better rate, sources familiar with the situation have said.

"We don't mind them (the trade creditors) getting a bit of a better deal, but we don't like the gap (between trade creditors and the banks) to be too wide," one Gulf-based banker told the publications.

The source said the offer had been sent to the trade creditors with a goal of offering the Islamic bond, or sukuk, by July, or earlier, if negotiations between the developer and its creditors are successful.

A high interest rate would enable trade creditors to sell the sukuk for more cash and the 10 percent offer will likely be squeezed higher, analysts said.

Recent bond issues by solvent firms have had interest in the same range. Dubai Electricity and Water Authority's bond and Saudi real estate firm Dar al-Arkan's sukuk offered coupons of 8.5 percent and 10.75 percent, respectively.

Please see related Real Estate Channel postings: