The Nakheel Sukuk

Posted on 2nd April 2016 by Camille Paldi , camille@faaif.com

Nakheel is a member of Dubai World and one of the UAE’s largest property developers. Dubai World is one of the largest holding companies in the world and was established to hold interests of the government of Dubai in companies under common management control. In Dec-2006, Dubai Islamic Bank arranged the Pre- Qualified Public offer Equity Linked Sukuk issue for Nakheel.  The sukuk was approved by the Shari’ah Board of Dubai Islamic Bank. It was documented according to the Eurobond Standard (Reg S) and is listed on the Dubai International Financial Exchange. It is the largest sukuk offering executed in the world at US$3.52 Billion. Dubai Islamic Bank and Barclays Capital were the joint lead managers and book runners. The issue was oversubscribed by 2.5 times and closed at US$3.52 Billion. Total order book was approximately US$6 Billion reflecting broad distribution and worldwide acceptance of this innovative sukuk structure. The sukuk were given the status of a sovereign bond by the rating agency: investors assumed an implicit Government guarantee for the sukuk. This is also clear by the high ratings given to the sukuk by Moody’s (AI) and Standard & Poor’s (A+).


The governing law of the sukuk transaction was designated as English and UAE law. The sukuk proceeds were used to fund the development of a number of projects including Jebel Ali Village, Jumeirah Islands, Dubai Promenade, the Lost City, Jumeirah Park and Jumeirah Village, Dubai Waterfront, and International City. A distinguishing factor for this sukuk is that it is the second convertible note offering (first being Ports Customs and Free Zone Corporation). The transaction documents include an Offering Circular, Trust Deed, Purchase Agreement, Lease Agreement, Purchase Undertaking, Sale Undertaking, Guarantees, Security – Share Pledge and Real Property, Mortgage Subscription Rights Sale Undertaking, Agency Agreement, and a Costs Undertaking.


Payment Schedule

The return on the certificates shall be calculated on the basis of a fixed return of 6.345% per annum (the QPO yield).  On the 14th June and 14th December in each year (Each periodic distribution date) commencing on 14th June 2007, the issuer will pay periodic distribution amounts to each certificate holder calculated as the product of 50% of the QPO yield and the principal amount of the certificates on a 30/360 basis.  In addition, on the redemption date (as defined herein) the issuer will pay to each certificate holder (i) the final distribution amount calculated as the product of 50% of the QPO Yield and the principal amount of the certificates on a 30/360 basis.


The originator in this structure was Nakheel Holdings -1 LLC.  Nakheel Holdings 1, 2, and 3 were subsidiaries of Nakheel World LLC, which held 100% of the shares in all three Nakheel Holdings. All three Nakheel Holdings had a subsidiary, Nakheel PJSC, which was operating in the real estate sector in Dubai. The parent company and 100% shareholder of Nakheel World was Dubai World, a 100% state-owned company.

Nakheel Sukuk Structure

The Nakheel Sukuk Structure was developed as a 3 year Pre-QPO Equity Linked Ijarah Sukuk wherein funds were raised at the Nakheel Holdings 1 (obligor) level. Under a purchase agreement, certain pre-identified assets were sold to Nakheel Development Limited – an offshore special purpose vehicle (Issuer SPV) that was formulated as a free zone company in the Jebel Ali Free Zone. The SPV issued trust certificates (sukuk) for US$3.52 billion in order to purchase assets from Nakheel Holdings 1.


The purchased assets were subsequently leased by the SPV to Nakheel Holdings 2 for a period of 3 years. A co-obligor guarantee was executed by Nakheel Holdings 1, Nakheel Holdings 2, and Nakheel Holdings 3 (together the co-obligors) in favor of the issuer SPV under which the co-obligors jointly and severally, irrevocably, and unconditionally guarantee the payment, delivery, and other obligations of each other under the transaction documents. Nakheel Holdings 2 in its capacity as the purchase undertaking obligor executed a purchase undertaking by which means Nakheel Holding 2 has undertaken to, in certain circumstances, purchase all of the Issuer SPV’s interest in the sukuk assets from the Issuer SPV. As a form of credit enhancement, Dubai World (guarantor) also granted a guarantee in favor of the issuer under which the guarantor has irrevocably and unconditionally guaranteed the payment obligations of the guarantor under the Dubai World guarantee constitute unsecured, direct, unconditional, and insubordinate obligations of the guarantor, which will at all times rank pari passu with all other unsecured and insubordinate obligations of the guarantor. Further, in order to secure the payment obligations of the co-obligors, Nakheel Holdings 1 has granted a mortgage over property and a share pledge of Nakheel PJSC shares in favor of the security trustee.


Guaranteed Allocation

There is a guaranteed allocation in the sukuk structure. Under the subscription rights sale undertaking, the sukuk structure incorporated a guaranteed allocation of 25% of the sukuk amount to investors in any qualifying public offering (QPO) undertaken by the Nakheel group during the tenor of the sukuk. A QPO means any primary or secondary equity offering of the authorized or issued share capital by any member of the Nakheel Group including in the form of global depository receipts, American depository receipts, any offering of mandatory exchangeable or convertible bonds, warrants and rights issues, in each case listed on any international stock exchange. Each certificate provides the holder the right to subscribe for QPO shares at the discount of 5% on the indicative share price on each QPO that is launched prior to redemption of the certificates. A QPO shall be deemed to be launched when the initial, preliminary, pathfinder or other equivalent offering document is published and/or made available to potential investors in connection with that QPO. The rights of certificate holders in aggregate is limited to an aggregate number of QPO shares equal to 30% of the aggregate number of QPO shares to be issued. As such, the aggregate value of the subscription rights in all QPO launched after the closing date and prior to the redemption date including the value of the subscription rights in that QPO does not exceed in aggregate US$880 million, being 25% of the sukuk issuance amount. However, in the event that the Nakheel Group does not float shares, then investors will receive a higher yield of up to 200 bps depending on the value of the subscription rights allocated to the sukuk holders.

Look Back Rights

The sukuk have a three year tenor, but investors will also receive look back rights for allocation of Nakheel Group QPO shares that extend into a fourth year. If a QPO takes place between years 3 and 4, investors can participate as though the QPO had taken place at the end of three years. The sukuk attracted a well-diversified global investor base and was over-subscribed. The allocation of the sukuk was mainly to European investors (38%).  On December 14, 2009, the lessee had to purchase the sukuk assets from the lessor in accordance with a purchase undertaking at a certain exercise price.  The Nakheel sukuk, however, went through turmoil and was nearing default as Nakheel holding was highly leveraged and its cash flow dried up when Dubai’s property sector suffered a massive slowdown after the global financial crisis.



Read More Here:

Bankruptcy Resolution and Investor Protection in Sukuk Markets by Kamal Abdelkarim Hassan and Muhamad Kholid http://www.financepractitioner.com/regulation-best-practice/bankruptcy-resolution-and-investor-protection-in-sukuk-markets?page=3


What did the Dubai World Default Show About Existing UAE Bankruptcy Legislation? By Camille Paldi http://www.ilovetheuae.com/blog/read:11228


Decree No. 57 of 2009 Establishing a Tribunal to Decide the Disputes Related to the Financial Position of Dubai World and its Subsidiaries  http://www.ilovetheuae.com/2010/02/17/decree-no-57-of-2009-establishing-a-tribunal-to-decide-the-disputes-related-to-the-financial-position-of-dubai-world-and-its-subsidiaries


Dubai Debt Crisis: A Legal Analysis of the Nakheel Sukuk by Omar Salah http://www.ilovetheuae.com/uploads/dubai.pdf


Recommendation: Establish one Islamic Finance Bankruptcy Court for all of the world’s sukuk defaults.

Recommendations for Islamic Finance in the Gulf http://www.ilovetheuae.com/2013/11/07/recommendations-for islamic-finance-in-the-gulf





Posted on 2nd April 2016 by Camille Paldi

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