Nakheel bonds surge on Dubai Ruler's comments

Nakheel bonds post their largest gain since February after Sheikh Mohammed bin Rashid said he was not worried about the emirate's debt burden.

DUBAI // Nakheel bonds posted their largest gain since February on Wednesday after Sheikh Mohammed bin Rashid, the Ruler of Dubai and Vice President of the UAE, said he was not worried about the emirate's debt burden. The developer's Islamic bond that matures in December rose more than 8 per cent to reach US$1.015 on Wednesday's afternoon trade as investors drew confidence that the closely watched Dh3.5 billion ($953 million) debt will be repaid.

The cost of protecting Dubai debt through credit default swaps also fell to the lowest in six months. The bonds had fallen to as low as 63.5 cents on the dollar in February amid fears that the government-owned developer of Dubai's Palm islands was contemplating restructuring its debt. "I assure you we are all right, the UAE is alright, and we are not worried," Sheikh Mohammed said on Tuesday evening, after being asked if Dubai would be able to repay its debts.

Investors view the Nakheel bond as a litmus test for Dubai's creditworthiness and its willingness to support government-related firms, which have fallen on hard times since the end of the six-year property boom last autumn. Property prices in the emirate have halved since their October peak and could fall further, according to a Deutsche Bank report. Credit rating agencies have downgraded several government-backed firms as they struggle to raise funds to refinance their debts amid tight credit markets. Standard & Poor's said in April that Dubai World, the state-owned investment firm that controls Nakheel, was considering all options "in dealing with outstanding liabilities", including restructuring.

"The movement in the sukuk price is a direct effect of Sheikh Mohammed's comments on Dubai debt," said Ali Khan, the managing director of the investment bank Arqaam Capital in Dubai. "It has helped restore investor confidence, which was evident from positive movements both in bond and equities markets." The Nakheel sukuk must be repaid on December 14, but the developer has not yet arranged a refinancing or restructuring of the bond, leading many investors to believe it will be repaid on time.

This has been reflected in the price of the bond, which has advanced steadily in recent weeks. Nakheel could draw on funds from a $20bn bond programme that the Dubai Government launched in February. Dubai borrowed the first $10bn tranche from the Central Bank and it is thought that the second tranche may come from a combination of the bank and international investors. Hamad Buamim, the director general of the Dubai Chamber of Commerce and Industry, said he expected Nakheel would receive the full support of the Government. "We believe Dubai Government stands behind such debt."

Chavan Bhogaita, the head of credit research at National Bank of Abu Dhabi, echoed the positive sentiment on Nakheel debt. "We retain a positive stance on Nakheel and continue to believe that there will be a positive outcome for bondholders," he told Bloomberg. additional reporting by Tom Arnold [e-mail]