Identifier
Created
Classification
Origin
09DUBAI392
2009-09-28 09:29:00
CONFIDENTIAL
Consulate Dubai
Cable title:  

DUBAI'S NAKHEEL LOOKS TO MARKET FOR DEBT COMPROMISE

Tags:  ETRD KIPR EFIN ECON PREL AE 
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VZCZCXRO5660
RR RUEHDH RUEHDIR
DE RUEHDE #0392/01 2710929
ZNY CCCCC ZZH
R 280929Z SEP 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 6636
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 9926
C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 000392 

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 9/28/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI'S NAKHEEL LOOKS TO MARKET FOR DEBT COMPROMISE

REF: A. A. DUBAI 000380

B. B. DUBAI 000354

DUBAI 00000392 001.2 OF 002


CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)
C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 000392

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 9/28/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI'S NAKHEEL LOOKS TO MARKET FOR DEBT COMPROMISE

REF: A. A. DUBAI 000380

B. B. DUBAI 000354

DUBAI 00000392 001.2 OF 002


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

1. (C) SUMMARY: Financial gossip in Dubai continues to revolve
around how mega developer Nakheel plans to address its massive
USD 3.5 billion Sukuk bond debt obligation due in December.
Although Dubai's credit markets have begun to thaw, most
analysts have come to expect an Abu Dhabi-funded bailout of the
firm. Nakheel's General Counsel has told us, however, of intent
to negotiate a rollover of a substantial, albeit undisclosed
amount of its Sukuk debt, with plans to pay the remaining debt
with Nakheel's own cash by December. The boldness of such a
deal, especially in light of rampant speculation of a possible
Nakheel default and expectations of an Abu Dhabi-funded bailout,
suggests a reassertion of Nakheel's control over its business
activities and a push back on the idea that a government bailout
is the only answer. Nakheel seems to be basing this strategy on
the assumption that Dubai's crippled real estate sector will
soon hit bottom - an assertion not shared by many analysts who
believe that point may still be months away. Meanwhile
Nakheel's contractors continue to complain about not being paid.
END SUMMARY.



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NAKHEEL NEEDS MORE TIME TO PAY DEBT

--------------




2. (C) David Nicholson, General Counsel of Nakheel, told Econoff
in a recent meeting that the company needs more time to pay its
debts and, therefore, plans to rollover a substantial portion of
the USD 3.5 billion Sukuk obligation due in December. The debt
rollover would be coupled with a partial payback of as much as
half of the owed amount, financed most likely by Nakheel's
recent sale of several of its large holdings and assets overseas
(Ref A). The deferment on the debt tells the larger story,
however, as investors have been following Nakheel's upcoming
debt resolution as a litmus test of whether Dubai is prepared to

face up to and resolve its debt crisis proactively, or content
to rely upon a bailout by its wealthier Federation partner, Abu
Dhabi. The rollover presented by Nicholson would provide
Nakheel time required to complete an internal restructuring and
deal with creditors head on. Nicholson said that Nakheel is
already undergoing the necessary due diligence on the proposed
rollover, but that a time frame for the extension has not yet
been set.



--------------

DEBT COMPROMISE IS A BET ON A DUBAI RECOVERY

--------------




3. (C) Nicholson expects most bond holders to support a partial
rollover of its debt because, in his estimation, Nakheel debt
holders tend to associate their position in the company as
linked directly to the long-term prospects for Dubai's economy.
Nicholson said that Nakheel is optimistic about its future,
particularly as the company expects a Dubai recovery in the
second half of 2010 to boost its business and reward its debt
holders and because Nakheel still has rights to about half of
Dubai's undeveloped land. He suggested that Dubai's real estate
sector is already on the eve of a critical bottoming out as
consolidation and normalizing prices have created much needed
interest and activity in the sector.




4. (C) Nicholson admitted that Nakheel has not yet received
agreement from its Sukuk bond holders to support such a plan.
In fact, a banker at EFG Hermes, reportedly Nakheel's single
largest Sukuk bond holder, confirmed to Econoff that it had not
approved any rollover. In spite of significant internal
financial constraints and contract headwinds with skeptical
creditors, Nicholson nonetheless appeared confident that Nakheel
could not only meet part of its December debt obligation with
its own cash, but also convince creditors like EFG Hermes to
accept a proposed debt rollover deal.



--------------

DUBAI 00000392 002.2 OF 002



REAL ESTATE CONSOLIDATION EQUALS RECOVERY?

--------------




5. (C) Nicholson cited the consolidation of Dubai Holding's
property interests with Emaar as a sign of the nascent recovery
and a coordinated effort by big real estate players to stabilize
the market and put a floor on prices by narrowing the
supply/demand gap (Ref B). The consolidated developers would in
turn be able to better share costs of future project
developments. He also described a more recent wave of
consolidation taking place in the market as a result of cash
rich agents purchasing and consolidating multiple distressed
properties from individuals on the verge of default. Agents
have been offering distressed buyers half or part of the money
they originally put down on properties in order to obtain the
rights to the property deeds. Now accounting for 10 to 20
percent of the real estate market, developers still have to
agree to allow agents to finalize these types of distressed
deals. Although Nakheel has not permitted its customers to
engage in such deals with agents, or itself been part of any
consolidation effort similar to Dubai Holding and Emaar,
Nicholson suggested that the deals seem to be cleaning out a lot
of the excess capacity.


--------------

U.S. COMPANIES NOT BEING PAID BY NAKHEEL

--------------




6. (C) In spite of Nakheel's plans to renegotiate terms with
bond holders and its optimistic views on a recovery, many
foreign based companies, including some U.S. contractors,
continue to complain privately that they have not been
compensated for services rendered to Nakheel. Due to the
sensitive nature of doing business in Dubai, many U.S. companies
are trying to broker some agreement with Nakheel behind the
scenes, albeit with minimal success to date. Nicholson
explained to econoff that Nakheel has simply not had the cash to
pay its contractors for work done on various projects.
Contractors have taken a back seat in Nakheel's restructuring
efforts. It is not clear exactly how much Nakheel owes to U.S.
entities; however, anecdotal reports suggest at least USD 178
million. Our counterparts at the French, Indian, and Malaysian,
and Dutch Consulates have shared with us similar stories of
non-payment to their companies.



--------------

COMMENT

--------------




7. (C) The assertion by Nakheel's General Counsel that the
company is renegotiating and restructuring its debt suggests a
possible turnaround for the ailing real estate giant. The news
of a proposed debt rollover is especially noteworthy for a
company that has remained particularly silent about its upcoming
debt repayment plans and has largely rebuffed press and investor
inquiries over the last year. The proposed deal also completely
contradicts many analysts' predictions that a government led
bailout would be the likeliest outcome in December. In spite of
this bold move, there is still no evidence that a largely
skeptical international market will embrace Nakheel's plans,
although the deal would suggest a move to more openly deal with
the market and possibly improve transparency. However, if
Nicholson's confidence is borne out, a successful debt
restructuring by Nakheel will be viewed positively as evidence
that Dubai may, after all, be capable of coming to terms with
its debt in a more transparent manner than we've seen to date.
END COMMENT
SIBERELL