Trade creditors holding the recently issued first tranche of troubled developer Nakheel's five-year Islamic bonds, or sukuk, are inviting bids for the paper, but buyers are so far limited, traders said.
The $1.03bn issue, the first instalment of a total $1.31bn offered as part of a restructuring deal to repay trade creditors, was issued at the end of August, and offers a profit rate of ten percent.
Two sources said investment bank Morgan Stanley was thought to be one of the bidders for an auction of AED320m of bonds offered by an undisclosed seller.
One of the sources, a Gulf-based fixed income trader, said there were about six banks in the market collecting bids for the bonds, while another said some banks were sourcing paper from creditors directly, to sell on to investors or hold themselves.
"There is definitely a great deal of interest among [trade creditors] looking to trade," said one person familiar with the matter, who declined to be identified.
"The creditors are actively investigating the pricing and there's an appetite for it. Some are taking the view of selling the entire holding, while others are looking to sell a portion and hold on to some of it for the interest."
Nakheel has indicated plans to eventually list the bond on Nasdaq Dubai.
Buyers who have expressed an interest include US investors, including hedge funds, London banks, and some regional relationship banks the trader said.
In July it emerged that a Hong Kong-based distressed debt firm founded by ex-Deutsche Bank veterans had approached trade creditors to taking the claims off their hands.
Latest bids on Nakheel 2016's range between 78.289 and 78.500, corresponding to a yield of between 16.6 percent and 16.3 percent, according to Thomson Reuters data, down from bids of just over 80.000 earlier in the day.
"Most contractors have already received 40 percent of their claim in cash. If they manage to monetise the remaining 60 percent [the sukuk] at current levels, this gives them an aggregate recovery on their Nakheel exposure of almost 90 percent," said Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi.
"This is pretty good, given the severity of this situation and also where estimated recovery rates stood some eighteen months ago," Bhogaita said, adding that though some trades were being executed in the market, volumes were not yet significant.
Nakheel, which developed island complexes in the shape of the world and a palm tree during the glitzy emirate's spectacular boom, was forced to write off up to AED78.6bn ($21.4bn) of its real estate assets after a property crash.The developer is restructuring a total of $16.06bn in debt, including $8.71bn of government debt, which is to be converted into equity.