When Nakheel issued about AED4bn ($1.09bn) of sukuk (Islamic bonds) to its trade creditors about a year ago, some holders quickly offloaded them on the secondary market eager to finally settle their outstanding bills from the Dubai-based real estate developer.
As a result, the prices of the sukuk crashed, at one point falling to as low as 70 per cent of their value. Since then, the prices have recovered. Now the price you pay for Nakheel debt on the secondary market is roughly equal to what you will get paid if you hold the bonds to maturity. Plus, you get the annual 10 per cent coupon payments.
In a low-interest environment, globally, that high coupon is particularly attractive, despite the risks associated with Nakheel, which restructured about $16bn of debt in 2010.
Trade creditors not used to holding financial instruments, such as the Nakheel sukuk, are taking advantage of the renewed interest in the debt by selling off now. Doing so also helps them from an accounting perspective before the end of the year. It is probably a wise move.
For financial investors, they are happy to get the yield from buying Nakheel debt, but beyond the current wave of trading, a broader question is being asked. Just how credit-worthy is the company now? So far, the indications are that things are improving, both at Nakheel and in the wider Dubai real estate sector.
The current buyers of Nakheel debt will enjoy the high yield for a while, but may become more reluctant to continue holding the debt as it nears maturity. Whether the company is in a position to repay all the outstanding sukuk when they start to mature in 2016 is a bet that even the most yield-hungry investors may feel nervous making.