Capital Markets, Islamic Finance, Middle East - Monday, February 1, 2010 21:44 - 0 Comments

Dubai: a default saved, an opportunity missed

Global Edge, Cerulli Associates, February 2010

In December, world markets reacted strongly to the news that an expected default on a US$3.52 billion sukuk issue from Dubai’s Nakheel Developments would not now take place, following a US$10 billion bailout by the Abu Dhabi government. For creditors in the Nakheel sukuk – the Islamic equivalent of a bond – the news was clearly good: only weeks earlier they had been told that Dubai World, the state-owned holding company that includes Nakheel, was entering a debt standstill and that they would have to wait indefinitely to get any of their money back. But one can also argue that Nakheel’s step back from the brink is a lost opportunity.

How so? Well, the Nakheel/Dubai World standstill represented something that has to happen at some stage, but hasn’t yet: a default in an international sukuk. Without it, uncertainty hangs over the whole sector and impedes its maturity. That, in turn, hinders its development as an asset class for fund managers. Continue…

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