The performance of Shariah-compliant bonds, or sukuk, has been stellar this year. But fears that a Dubai-based conglomerate might default spooked traders, stalling Islamic bonds’ upward climb.

Sukuk 10-26-09

Nakheel, a state-owned developer and large sukuk issuer, was under pressure as the December deadline for repaying a US$3.5bn bond approached. That was until the government of Dubai, as part of a US$6.5bn fundraising plan that emerged yesterday, pledged to guarantee the outstanding issues of Dubai World, Nakheel’s parent. Among other measures, the government will refinance its debt by issuing a US$2.5bn sukuk. In its first foray to the bond market since the credit crunch, the issuer will find a very different attitude among investors than before, when conditions were such that Nakheel hatched plans to build a series of luxury properties on massive palm-shaped islands off the emirate’s coast.