Industry News - Nakheel Hopes Prudent Approach Will Convince Investors Worst Is Over30 Sep 2011 • by Natalie Aster
Dubai developer Nakheel announced in August 2011 that it planned to issue AED3.8bn (US$1.03bn) of Islamic bonds to creditors and contractors as part of the company's US$16.1bn debt restructuring. While concerns remain, the completion of the restructuring is a major step for the company toward reassuring investors that it has finally turned a corner. Nakheel's adoption in recent months of a more sustainable and measured approach to its business, which involves greater focus on consolidation and less on new business and land development, adds support to this view.
The release of the bond prospectus to creditors on August 25 (and later reported on by Bloomberg and Reuters), sheds further light on the painful extent of Nakheel's financial problems in the wake of the Dubai property crash. According to the document, the company incurred write downs on its assets of AED78.6bn (US$21.4bn) from 2008 through to the first half of 2010, as property prices dived and projects were cancelled or abandoned. Indeed, Nakheel was at the heart of the debt problems faced by parent company Dubai World, whose request for a standstill on US$25bn worth of loans shook global markets in 2009. With countless projects delayed or abandoned, Nakheel found itself unable to meet its debt obligations, requiring, as a result, a complex restructuring of its debt.
A Sector Still Struggling
Dubai World Vs Dubai Financial Market Real Estate Index (Rebased Jan 2008)
The planned AED3.8bn (US$1.03bn) bond issue, with a further AED1bn also to be issued, will go to creditors, contractors and suppliers as part of the US$16.06 debt restructuring package. The bond issue reflects Nakheel's decision to focus on consolidation and existing business as it seeks to establish a more sustainable approach to growth. With so much debt outstanding and so many projects unfinished or not selling, Nakheel's decision to focus on appeasing existing investors and creditors is clearly a prudent one.
Recovering, But Dubai Still Lagging
UAE Construction Industry Value, Real Growth (%)
f=forecast, Source: BMI, UAE National Bureau of Statistics
This strategy shift was further underlined in August bond prospectus, with the company emphasising its commitment to completing existing projects and concentrating on fewer and more carefully chosen developments. With both investor sentiment and demand for new projects in the emirate's commercial and residential building sector (Nakheel's core sectors) weak, there is little to gain from pursuing new business in the emirate even if the company had sufficiently deep capital pools. The company is seeking to scale back its capital expenditure, and this has brought a greater focus on income generating assets such as the bolstering of its leasing business, including malls and hotels.
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