BT : Dubai waterfront land may be seized

Published December 8, 2009

Dubai waterfront land may be seized

(LONDON) Nakheel PJSC creditors may win the right to seize a strip of barren waterfront land the size of Manhattan if the company defaults on the US$3.5 billion bond backing the development.

Investors will be able to seek foreclosure on the property's mortgages should the Dubai World unit fail to repay the loan, according to the bond's prospectus.

The debt is due next Monday, after which Nakheel has two weeks to remedy a default. The property forms part of the Dubai Waterfront project, where Nakheel plans to build a city twice the size of Hong Kong.

Dubai World is trying to restructure US$26 billion of debt after seeking a 'standstill' agreement on liabilities, including Nakheel's sukuk bond on the waterfront parcel.

The bond is secured against a 50-year lease on 63 million square metres of land on which Nakheel plans to build the southern part of Dubai Waterfront, and a series of manmade islands in the shape of a crescent.

'The project isn't likely to happen,' said Saud Masud, a Dubai-based property analyst at UBS AG. 'I'd be very surprised if anything is built in the next five years.'

The land was valued at US$4.2 billion by Jones Lang LaSalle Inc three years ago, based on the entire project being ready by 2018, when it would be worth US$11.8 billion, the prospectus said.

Sukuk are securities that comply with Islamic law, which forbids interest-bearing bonds. The leases on the two Nakheel properties were sold to a special-purpose vehicle that issued the sukuk. They were then leased back to Nakheel, which made rental payments to stay within the law.

The sukuk's trustee, acting on behalf of noteholders, can 'take any action to enforce any of the security documents', if Nakheel doesn't redeem the bond, said the 2006 prospectus, which classifies the mortgages as security documents.

'The outcome of Nakheel will set the tone of how people will approach the question of access to assets, what a security package is really worth, and legal rights with a jurisdiction,' said Brinda Kirpalani, head of credit and convertible research at ADI Alternative Investments SA in Paris.

The waterfront project was among Dubai World's most ambitious. Dubai Waterfront posters had lined a wall of billboards about 10 metres high and stretched for at least a kilometre along Sheikh Zayed Road, which surrounds part of the land. The posters were removed in the last month. Smaller billboards with Nakheel's corporate logo remain.

Now the area is bare, except for a cluster of partly finished low-rise buildings and idle cranes for hundreds of metres. Yesterday, camels roamed part of the land. . -- Bloomberg