In 2009, a rash of Sukuk defaults, culminating in the huge Nakheel default in Dubai, rocked the market for Islamic bonds, or Sukuk. Creditors in the Dubai World and Nakheel reorganizations all took significant haircuts, with certificate holders in the latter receiving a hybrid of cash and future bonds in compensation.

Now, a supposedly rehabilitated Nakheel is issuing a new Sukuk. But, as the article below details, serious questions linger about whether this issue is on the up and up…

On the other, some of the lessons from the old days may not have “sunken in.” Given what it admits is an “oversupplied” real estate market, with “inherently subjective and uncertain” valuations, whether the new and improved Nakheel will again prosper remains an open question.

…those inclined to scrutinize Nakheel’s…sukuk offering…might note the last audited figures cited in its offering memorandum date back to year end 2008.

Among the risk factors included in the most recent Sukuk:

  • Neither Dubai World nor the Government of Dubai is legally obliged to provide any additional funding to the Nakheel Group;
  • The Nakheel Group has recorded significant asset impairments, write-downs and declines in its results of operations in recent periods that have resulted in significant losses and the Nakheel Group may incur further significant asset impairments write-downs and losses in the future;
  • Consumers are increasingly reluctant to buy property that is not complete or nearly complete or to buy property for investment purposes and their preferences have shifted away from speculative and high-end real estate to more affordable real estate;
  • Inability of Nakheel’s customers to obtain financing and to pay;
  • The Dubai real estate market is oversupplied; and
  • The interests of the Nakheel Group’s direct and indirect shareholders may not align with those of the Certificateholders.

No matter how willing the market may be to believe the Dubai government will standby and keep Nakheel afloat, the Sukuk offers plain language to the contrary.

Worth noting also, is the Sukuk’s disclosure that “Nakheel Group has recorded losses in the fair value of its properties in the amount of AED 73.8 billion for the year ended 31 December 2009.” (emphasis added) Lest anyone confuse dirhams with Monopoly money, this equates to more than 20 billion U.S. dollars. It’s not Lehman Brothers huge, but it’s a breathtaking write-down for one company.




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