This weekend Muslims across the Gulf will celebrate the Eid al-Adha holiday, when custom calls for the sacrifice of a prized animal. In an extraordinary series of announcements today, Dubai’s creditors saw the value of their holdings sliced. Few are celebrating.
In the morning, the government of Dubai announced that it had raised US$5bn from two Abu Dhabi-based banks, with the proceeds added to US$10bn raised earlier in the year to support businesses in the emirate. Fears about the December repayment of a US$3.5bn bond from Nakheel, the beleaguered builder of palm-shaped island developments, were assuaged further. At the height of anxiety earlier this year, Nakheel’s sukuk (Islamic bond) was trading as low as 65 cents on the dollar. Subsequent fundraising and pledges of government support sent the bond’s price to 110 cents and provided support to a rally in Islamic debt more generally.
But shortly after the government’s first announcement came another communiqué that sent the price of Nakheel’s debt crashing. The billions of dollars raised today, the government said, were for the “general purposes” of the state support fund and not Nakheel. Instead, Nakheel and its parent, Dubai World, would ask creditors for a “standstill” on debt repayment until the end of May next year. A partner from Deloitte would soon start work on restructuring Dubai World, the statement added. Needless to say, this news saw the price of Nakheel’s debt plunge, closing the day at 86 cents on the dollar. Credit-default swaps for Dubai shot upwards. The precarious state of the emirate’s finances will be a popular talking point this holiday season.
UPDATE (Nov 26): The Bloomberg terminal suggests that the bond’s price is now trading in the low 70s. Reuters is reporting that a conference call for Nakheel’s bondholders scheduled for today was postponed after phone lines were overwhelmed. Agreement from investors on the “standstill” request is crucial for Nakheel to avoid a technical default, with grave implications for its parent company, Dubai World, as well as the emirate in general.