Nakheel holds talks with Dubai World about Islamic Bond

Nakheel PJSC is holding talks with its parent Dubai World about a $3.52 billion Islamic bond that matures on Dec. 14, was said in a statement to Nasdaq Dubai today.  The statement didn’t provide details on whether the talks are about restructuring or repayment of the debt. Dubai World, the state-owned company grappling with $40 billion of debt, has guaranteed Nakheel’s bond, according to the offering prospectus.

Nakheel’s bond prices rose to an all-time high of 110.6 cents on the dollar this week, up from 91.5 cents three months ago and more than 90 percent higher than a February low, according to Barclays Capital Group prices on Bloomberg. The prices dropped by the most in four weeks today, declining 1 percent to 109.55 cents.

The developer owes more than $5 billion in Islamic bonds by 2011, Bloomberg data show. Nakheel accumulated debt during a five-year real-estate boom in Dubai in which the sheikdom borrowed $10 billion and its state-controlled companies $70 billion to help diversify the economy. They have to repay $15.8 billion of bonds and loans maturing this year, $9.2 billion in 2010, $19.8 billion in 2011 and $17.3 billion in the following year, according to a Deutsche Bank AG report in August.

The cost to protect against a default by Dubai dropped to a year-low of 287 basis points on Oct. 20, compared with a record 977 basis points in February, credit-default swap prices on Bloomberg show. The contracts, which fall as perceptions of credit quality increase, were at 302.9 basis points yesterday, still the sixth-highest cost for a sovereign worldwide behind Ukraine, Venezuela, Argentina, Latvia and Lithuania.

Islamic debt is governed by Shariah law barring investors from profiting from the exchange of money, as happens with interest payments on other bonds. Returns from exchanging funds for assets are allowed, as long as gambling, guns and alcohol aren’t involved. Bankers structure sukuk to generate income from real estate and other permitted investments.