What might Nakheel 2010 bondholders be offered?

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Nakheel bondholders nervously await a proposal to restructure a USD 980 million dirham-denominated Islamic bond maturing May 13 as an indicator of how Dubai will deal with its much larger debts.

Nakheel is one of two property arms of state-owned conglomerate Dubai World , which is working on a plan to restructure USD 26 billion in repayments with more than 90 creditors.

In December, a lifeline from Dubai's neighbour Abu Dhabi staved off a default on Nakheel's USD 4.1 billion sukuk maturity, after bondholders - mainly international hedge funds - threatened revolt.

The majority of holders of Nakheel's 2010 sukuk are thought to be UAE banks - 80% by IMF estimates. Sources close to the matter have told Reuters that repayment is unlikely, and that all options remain on the table.

Below are possible restructuring scenarios which could be presented to bondholders:

A debt swap deal

A bond swap involves selling one bond issue and buying another at the same time. There are various types of swaps, ranging from stretching out maturities, to offering higher yields.

Dubai could offer sovereign bonds to investors as part of a debt swap deal, one banking source said.

"They could swap for government debt have a Dubai government bond. Dubai government isn't going to fail on its obligations. But it depends on the deal terms," the banker said, adding bondholders could go for the swap for higher returns.

A "friendly" debt swap with creditors of Ukraine's state energy company Naftogaz had led to a complete swap of its entire foreign debt for a new 5-year issue, with a coupon payment of 9.5%, higher than the 8.125% on the previous bond.

"They can swap it for another (Nakheel) paper - maybe for two years," said another banker, adding it would not be too difficult to secure consensus among bondholders but the holders might ask for some sort of guarantee under the new agreement.

An extension of maturities is the most likely option, bankers said, but whether bondholders would take a haircut - and the scale of the haircut - will be deciding factors on whether the bond restructuring is seen as friendly or unfriendly.

Restructurings frequently involve a haircut, where investors realize a loss on the market value of their holding.

Working the bond into a loan

Another option could be to convert the bond into a bilateral loan, said one banker. If 70-80% of bondholders are local banks, then a loan option becomes more likely, which could see maturities indirectly stretched for a number of years.

However, credit committees may be unwilling to increase banks' exposures to Nakheel, and indirectly, to Dubai World, despite the short-term reputational benefit this option may reap.

Anything that puts Nakheel in a weaker economic position may be seen by ratings agencies as a distressed restructuring and a default, said one analyst.

Wider Dubai world restructuring

Dubai World's restructuring plans include the debt at its two property units, Nakheel and Limitless, so a proposal to bondholders as part of the broader restructuring deal is likely to make reference to Nakheel 2010 sukuk, bankers said.

"Our understanding is that the Nakheel bonds due in May will be part of the Dubai World restructuring," said an Abu Dhabi based banker close to the matter.

Adminstration

Unlike Nakheel's 2009 bond, the one maturing in May does not carry a guarantee from its parent Dubai World and hence bondholders have no recourse to Dubai World assets.

According to an Abu Dhabi-based source, investors are in very early talks with a law firm in London to examine what their options are, but expect clarity on a restructuring plan from Dubai World before the maturity date.

Any claims filed against Nakheel will be heard by the Special Tribunal Related to Dubai World, based at the Dubai International Financial Centre. No claims have yet been filed.

Full repayment

Bondholders are unlikely to be pleasantly surprised this time round with full repayment but expecting the unexpected is a region-wide trend.

Sources familiar with the matter have however said a full repayment is "incredibly unlikely".