Nakheel trade creditors to get 10pct on bond

Dubai property developer Nakheel's trade creditors, unpaid for months, will be offered a hefty 10 per cent return on a planned Islamic bond as Dubai tries to unblock a cycle of stalled bill payments to kick start its economy.

Dubai unveiled a $9.5bn rescue plan for Nakheel's parent, state-owned Dubai World, last month, which calls for Nakheel's trade creditors to get repayment of 40 percent in cash and 60 per cent in a tradable security.

A source familiar with the matter said on Thursday the 10 per cent return is a starting point for negotiations with trade creditors of the company, famous for its artificial islands built in the shape of palm trees and a map of the world.

The offer is a generous one - especially in light of Dubai World's opening offer to bank lenders of just one percent on two new tranches of debt maturing in five and eight years - and signals the trade creditors' dominant position in debt talks.

"It's about the importance of the real estate sector to the economy," the source said. "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 flow, it will put pressure on construction and real estate markets, which will affect workers at the firms and hurt the overall economy, he said.

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

Khuram Maqsood, managing director at Emirates Capital, said trade creditors were vital to Nakheel's future business, unlike bank lenders who 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," he said. "The future liability of their business is very much a function of their vendors coming through with completing their services."

The first source said the offer has been sent to 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 will enable trade creditors to sell the sukuk for more cash and the 10 per cent offer will likely be squeezed higher, analysts said.

Recent bond issuances by solvent firms have had interest in the same range, with Dubai Electricity and Water Authority and Saudi real estate firm Dar al-Arkan offering coupons of 8.5 per cent and 10.75 per cent respectively. The Saudi issue was also an Islamic bond.