NAKHEEL DEBT DEAL WEIGHS ON DUBAI'S ECONOMIC RECOVERY

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000380

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 9/14/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: NAKHEEL DEBT DEAL WEIGHS ON DUBAI'S ECONOMIC RECOVERY

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CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)

1. (C) SUMMARY: The upcoming USD 3.5 billion Sukuk debt
repayment for Dubai-based real estate mega developer, Nakheel
Properties Inc., is the hot topic in financial circles. The
odds are high that Abu Dhabi, vis-`-vis the UAE Central Bank,
will intervene to cover the debt, raising hopes for Dubai's
economic health. The spotlight on Nakheel has also brought back
to the forefront scrutiny of the Dubai government's slow
response to the economic crisis and its own questionable
solvency. Observers are using the handling of Nakheel's debt
both as a marker of Dubai's economic health and its ability to
handle difficult financial transactions in a reasonably
transparent manner. END SUMMARY.



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NAKHEEL IN THE SPOT LIGHT

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2. (C) A subsidiary of the government controlled Dubai World
and, with Emaar, Dubai Inc.'s most notable real estate
developer, Nakheel Properties' financial hardships over the last
year have become almost synonymous with the economic down-turn
in Dubai. (Note: Nakheel is, among other projects, behind
Dubai's signature, and costly, "Palm" Islands. End Note.) The
real estate developer's plight has sparked considerable interest
among international investors who tend to see Nakheel's
uncertain future and potential default on its USD 3.5 billion
Sukuk debt repayment in December 2009 as a benchmark for Dubai's
economic prospects. The developer is believed to be insolvent,
as real estate values and income from its Dubai based properties
have plummeted by as much as 50 percent since this time last
year and the easy credit which fueled its growth has all but
dried up.




3. (C) Recent interest in Nakheel stems from a USD 3.5 billion
Sukuk bond (i.e. Islamic bond) the company issued in 2006 to
fund its massive property developments in Dubai and global
buying binge. The Sukuk bond came with a standard guarantee by
Nakheel to buy back the bonds outright at the time of maturity
(December 2009) and pay out any accrued profits to investors.
The Sukuk bond entitled creditors to a debt ownership stake in
the company, with the potential for a higher payoff with asset
appreciation and incremental rents paid by Nakheel. The Sukuk
bond, although structured similarly to a normal bond, explicitly
does not allow interest to be accrued on the debt and complies
with Islamic Law. Since Nakheel is a subsidiary of government
owned Dubai World, investors expected at the time of issuance
that all debts would be backed by Dubai authorities.



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ABU DHABI TO THE RESCUE

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4. (C) While the Dubai government will almost certainly come to
the aid of Nakheel, it will likely do so primarily with funds
from the USD 10 billion it received from Abu Dhabi as a result
of the UAE Central Bank's partial purchase of its 20 billion
bond offering last spring. Dubai Ruler, and UAE Vice President,
Mohamed Bin Rashid al Maktoum told reporters September 8 he was
"not worried" about covering looming debt payments, a comment
that sent Nakheel's sukuk bond to a one-year high at 102 cents
on the dollar, largely on the supposition that it reflects
Dubai's ability to rely upon Abu Dhabi to continue bailing out
its ailing parastatals. Nakheel alone will swallow a
substantial chunk of the cash Dubai received from the first
tranche of funds from the bond offering.




5. (C) A bailout on this scale would also mark a pivotal point
in the federal government's, and ultimately Abu Dhabi's,
intervention in Dubai's economy and could be a prelude to
additional, more extensive bailouts, according to Paul M Koster,
CEO of the Dubai Financial Services Authority. In fact,
Nakheel's parent company, Dubai World, is purported to have an
estimated USD 60 billion in debt (various sources put Dubai's
total debt around USD 80 billion, but many believe it is

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significantly higher - we have heard as high as USD 150
billion). Also there is significant market pressure for Abu
Dhabi to continue to finance any potential future bailout,
particularly since exposure to excessive Dubai debts of this
scale may push the cost of borrowing up across the UAE.
(Comment: One financial insider told Ambassador that Abu Dhabi
is already paying a higher premium because of the market's
expectation that it will ultimately foot the Nakheel bill. And
lastly, what concessions Abu Dhabi might demand from Dubai in
return, remains a matter of intense speculation as little hard
information exists. End Comment.)


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NAKHEEL DEAL TRANSPARENCY: LITMUS TEST?

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6. (C) A Nakheel bailout would be a significant benchmark for
transparency for the Dubai authorities, according to Martin
Kohlhase, an Assistant Vice President at Moody's Investor
Service in Dubai. If a deal is struck, the markets will have a
better sense of the direction Dubai plans to take in the near
and medium-term restructuring of the economy. A wholesale
bailout backed by Abu Dhabi through Central Bank infused
dollars, rather than an orderly sale of Nakheel, could indicate
a tightening grip on Dubai Inc. entities. On the other hand,
although now very unlikely, a negotiated debt restructuring and
possible sale of Nakheel would represent increased transparency
and reliance on the market. Smart money feels that Dubai with
the help of Abu Dhabi will do a wholesale bailout of Nakheel in
December and will continue to cover its still outstanding debt
load, which could make up a sizeable portion of its parent
company's (Dubai World) estimated USD 60 billion debt.
According to Paul Bagetelas, Managing Director of The Carlyle
Group's Middle East division, the Dubai authorities remain
reluctant to enter serious discussions with private investors
who are keen to buy out ailing government or ruling family
affiliated companies such as Nakheel.



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NAKHEEL HURT BY DUBAI's SLOW RESPONSE

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7. (C) Koster explained to econoff in a recent meeting that
criticism over Dubai's slow response to the economic crisis and
its devastating effects on Nakheel remains high. Early bailout
dollars for Nakheel would have been a boost of confidence for
the ailing real estate developer and been used to repurchase a
sizeable chunk of its Sukuk bonds in the open market where they
are traded. In February 2009, Nakheel's Sukuk bond prices
dropped to as low as 63 cents on the dollar, offering an almost
40 percent discount to the initial offering price. Many believe
that Nakheel could have substantially lowered its current debt
load if it had bought some of its bonds back at a discount and
realized the gains resulting from the recent price recovery.
Nakheel bonds were trading close to 90 cents on the dollar prior
to MBR's comments noted above.



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NAKHEEL'S FOREIGN OWNERS IN THE DARK

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8. (C) Foreign bank participation in the potential restructuring
of Nakheel's debt obligations is cloudy at this point,
particularly since so few details have been released by
authorities. Many of these banks, who own 70 percent of
Nakheel's Islamic bonds, continue to rationalize losses on their
significant loan portfolios, especially since real estate values
have plummeted by as much as 50 percent since this time last
year. Banks remain unsurprisingly skeptical about adding to the
already huge debt load in Dubai by increasing lending again or,
in the case of Nakheel, making substantial concessions in any
potential debt restructuring plan. Koster believes, however,
that many foreign creditors would come to the table if the

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Government of Dubai requested their help in restructuring
Nakheel's debt. Koster explained that these creditors, largely
banks, want to continue to do business in Dubai without fear of
government backlash if they refuse to renegotiate their terms.



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NAKHEEL SHEDS FOREIGN ASSETS FOR CASH

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9. (C) Despite investors, bankers and creditors being largely in
the dark about how Nakheel's December debt obligations will be
met, the company has been very publicly attempting to shed or
monetize many of its non-performing assets possibly to generate
funds for this purpose. In late August, Nakheel raised USD 160
million from the sale of its position in Australian based real
estate company, the Mirvac Group at an 80 percent loss.
Additionally, Nakheel hastily prepared a deal with South Africa
to allow its mega cruise ship, the Queen Elizabeth II (QE2),to
dock in Capetown and begin operations as a floating hotel. The
QE2 was purchased for USD 100 million in 2007 and has since sat
idle off the shores of Nakheel's Palm Islands. Other
high-profile busts for Nakheel include its USD 375 million Miami
Fontainebleau Resorts purchase and the still unutilized World
Islands development that have not shown any return to date.
Nakheel is now more commonly known for its growing stable of
non-performing assets and ballooning debt load rather than as
the master builder of Dubai.



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COMMENT

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10. (C) The Government of Dubai's handling of the Nakheel debt
repayment will no doubt continue to generate significant
interest in and out of Dubai as the Emirate's economic future
seems very much linked to it. Dubai has significant ground to
cover in order to win back much needed confidence from a largely
skeptical international market. A reasonably transparent
Nakheel deal may offer Dubai that opportunity. But ultimately,
this issue will boil down to Abu Dhabi's willingness to continue
bailing out Dubai and, if so, what demands are made in return.
A further erosion of Dubai's traditional independence vis-`-vis
Abu Dhabi is possible, but the specifics are far from clear.
END COMMENT.
SIBERELL