Sunday, December 13, 2009

Hey, you guys pray for full redepmtion of the Nakheel Sukuk, I've got some buying to do!



Optimism is once again sweeping Dubai taking share prices higher. There are several reasons for Dubai shares to go higher. Some progress has been made on the Iranian nuclear issue which may ease tensions in the Gulf. Additionally shares of Emaar, the most important stock in Dubai have been rallying now that it will not have to take over the real estate albatrosses of Dubai Holding.

Probably the strongest reason is optimism about the potential for a deal with regard to the Nakheel Sukuk and the belief that a settlement will be reached with creditors something along the lines of partial redemption in cash plus new securities with a lower rate and longer date. That may well happen but it has to be done in such a way that no group of 25% of the sukuk holders object. That may be difficult because a lot of the sukuk holders are long from much higher. If 75% of the sukuks had changed hands after the price collapse I think they might have a chance of that but Idoubt that's the case.

Bloomberg also has a story out about how the Nakheel Sukuk will trigger a cross default of two other sukuks that are outstanding. This is true but is not as interesting. Those two sukuks do not have a guarantee from the parent company so they'll either be paid out in cash or become the proud owners of more desert land in Dubai if they are GCC nationals and nothing if they are not. It may trigger a crisis in sharia finance but it won't force a Dubai World default and given that Nakheel can just hand over the trust assets (which consist of undeveloped desert along Shiekh Zayed road and the Dubai Waterfront Central Business District on a non-existent Island) and walk it may not have much effect on Nakheel either.

So if you are a GCC national who has no interest in taking ownership of a non-existent island which may or may not become the Central Business District of the Dubai Waterfront development or are non-GCC national who cannot take possession even in the event that the Island is brought into existence you should probably be selling your Nakheel 2 and Nakheel 3 sukuks. If you believe that Dubai World will pay out on Nakheel Sukuk 1 then you should join the guys down on the DFM floor and be buying with both hands.

It is perhaps too easy for people to dismiss the optimism of Dubai but I'm sure people laughed when they talked about their plan to build a palm tree shaped island in the Persian Gulf but there it is. People probably laughed when they said they would build the worlds tallest building but it's almost done. Now people are laughing at the idea that they'll pay off the sukuk. I guess we'll see who's laughing tomorrow.

Personally my strategy is to pray... and buy... puts.

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