Contractors have started selling off bonds given to them by Nakheel as payment for millions of dollars of outstanding debt, just days after the bonds were issued.

As contractors try and offload the bonds, the value has dropped significantly. Bond traders expect the value to fall further as more contractors opt to sell the bonds and get repaid now rather than wait for the bonds to mature in 2016.

Nakheel finances
($m) Six months to 30 June 2010 2009 2008
Assets 21,104 21,828 42,341
Bank balances and cash 101 132 536
Total equity 2,873 2,857 23,711
Revenue 699 855 4,610
Gross profit 270 375 2,285
Contract termination costs 900 185
Profit 16 20,855 138
Source: Nakheel

Several banks contacted by MEED say the Nakheel bonds are currently trading in the secondary market at around 80-81 cents on the dollar and are expected to fall further. “At the moment, Nakheel bonds have yet not found a level of support in the market yet and I can see them falling below where they are now,” says Elie Pano, a bond trader at JP Morgan in London.

Mark Watts, head of fixed income at National Bank of Abu Dhabi, says it could take six to eight weeks before the Nakheel bonds stop falling and find a stable price.

The slide will be exacerbated because Nakheel has not yet finished issuing the bonds to creditors. Nakheel has set up a programme to issue AED8.5bn ($2.3bn) of bonds to contractors and trade creditors in order to pay off the last of its unpaid bills from two years ago. So far AED3.8bn has been issued and at least another AED1bn is expected to be issued over the coming months, so there is still a significant amount of the bonds to come from Nakheel. As more are handed out to the trade creditors, more will end up in the secondary market.

“We expect to see the trade creditors continuing to gradually sell off their Nakheel bonds and taking the view that they are better off with the money now,” says Watts.

The danger for creditors who are last to sell off their Nakheel bonds is that they will get the worst deal from the market.

Nakheel stopped paying its creditors and other debts in 2009 when the collapse in the financial markets and the bursting of Dubai’s real-estate bubble forced the company to write off AED78.6bn ($21.4bn) in the value of its property assets. So far 40 per cent of their claims on Nakheel have been repaid in cash and the sukuk will represent the last 60 per cent of what Nakheel owes them.

Creditors who have waited for two years to get paid are generally not in the position to wait for another five years for the bond to mature, particularly as many of them have sub-contractors who they in turn owe money to. “Nakheel’s trade creditors are desperate for cash,” says a bond analyst based in London. “There is also more supply coming from Nakheel so there will still be quite a lot of selling to be done.”

Buyers of the Nakheel sukuk in the secondary market have mainly been international hedge funds. “The local investors tend to be staying away from it,” says one bond trader in the region. “But some hedge funds who are looking for yield are attracted by the 10 per cent yield on the Nakheel bonds.”

Although buyers exist for the Nakheel bonds, worries persist about the ability of Nakheel to service its debts. “There is still a lot of uncertainty around Nakheel,” says the bond analyst. “If you look at the latest figures there is still not much income, and that is reflected in its peers as well like [Abu Dhabi developer] Aldar and [Dubai’s] Emaar.”

In the prospectus for the trade creditors bond, Nakheel said it made a profit of AED58m in the first six months of 2010, compared to a loss of AED76bn in 2009 and a profit of AED505m in 2008. Between the end of 2008 and the end of June 2010, the firm’s assets fell from AED155bn to AED78bn.

As a result of Nakheel’s debt problems the company reduced its workforce from 3,818 in October 2008 to 986 by March 2011, a fall of 74 per cent.