Dubai: What will happen in Dubai on Monday? That's when Nakheel's $3.5 billion Islamic bond is due to mature. A full, timely repayment looks unlikely and creditors to the troubled property group, whose parent Dubai World last month announced its intention to restructure liabilities of $20 billion, haven't agreed to the requested 6-month standstill.
Yet, Monday doesn't look like the crucial day. Under the terms of the bond prospectus, Nakheel will still have a 14-day grace period to find a resolution. The developer will only technically default if it fails to repay the bond or reach an agreement with at least 75 per cent of the bondholders by December 28. It's then things could start to unravel for Dubai World. New York hedge fund QVT Financial has formed a bondholder's group which is exploring legal options. The group reportedly represents 25 per cent of the bondholders, enough to block any unfavourable restructuring and probably enough to trigger an effort to seize the assets which secured the bond.
Nakheel's bondholders have three levels of guarantee. Unlike a typical Islamic bond, this particular issue is asset-backed and securitised against a piece of Dubai Waterfront land which was valued at $4.2 billion at the time of issuance. But the current value of the incomplete project probably does not cover the bond's principal. The second guarantee comes from Nakheel itself, and the third from parent Dubai World. Nakheel's bondholders have the same legal rights as the Dubai World's unsecured lenders.
Dubai World is trying to ring-fence its better assets, including its 77 per cent stake in profitable ports operator DP World, from the planned financial restructuring. Nakheel's creditors could object, but because the legal situation is murky, creditors might do better in a negotiated agreement than in the courts. In any case, a Monday non-payment is unlikely to cause any immediate fallout. Credit rating agencies have already downgraded entities related to Dubai's government to reflect the diminished expectation of sovereign support. Still, a quiet Monday for Dubai won't set the tone for what follows.