Sunday, December 13, 2009

Nakheel sukuk bailed out by Abu Dhabi

Zawya Dow Jones is reporting that Abu Dhabi has provided $10 billion in financing to the Dubai Financial Support Fund and that $4.1 billion of this will be used to repay the sukuk issued by Nakheel, guaranteed by Dubai World, maturing today. The article stated that:
Dubai's government Monday said it received $10 billion in financing from Abu Dhabi, which will pay part of the debt held by conglomerate Dubai World and its property unit Nakheel.

"As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today," the Dubai government said in an emailed statement.

This is a stark reversal from the recent statements by Dubai’s government following the request for a standstill on all Dubai World debts, including Nakheel. The government had stepped away from the debts saying that there was a difference between government-owned companies and government-backed companies. The request for standstill agreement had turned into a crisis for other Dubai and UAE companies with ties to the government, most concretely DEWA, which had $2 billion in debts that were backed by the government that would have been subject to an accelerated payment schedule. The statement also indicated support for the working capital needs of Nakheel through the end of April, contingent upon it negotiating a standstill agreement with other creditors.

However, the repayment of the Nakheel sukuk and a limited support for Nakheel only kicks the can down the road for the other sukuk due from Nakheel as well as a large Shari’ah-compliant loan due in March by Limitless, the international property subsidiary of Dubai World. There are also two more sukuk totaling over $1.5 billion that come due between now and 2011 in addition to a pile of debts of other Dubai World companies.

The Nakheel sukuk was repaid with essentially a bail out from Abu Dhabi, which should lead to some questions about whether Abu Dhabi will also come to the aid of other Dubai World companies as well as whether Abu Dhabi will expect to receive other assets from Dubai in exchange for the bailout.

While this repayment certainly takes the heat off of the Islamic finance industry and the sukuk market in particular for the moment, the questions that had become common points of discussion about whether creditors would have recourse to the assets underlying unsecured sukuk will remain. This is still a thorny time for Islamic finance with the attention now being paid to these issues and it will probably not be resolved quickly. Dubai World will be the spark that should ignite introspection on the limits of innovation and particularly innovation that replicates ever more complicated conventional products.

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