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) 
¶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. 
 
 
 
----------------------------------- 
 
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