Risk Management in
Islamic Financial Instruments
170
Since they were issued by a public sector enterprise, the sukuk were given the status of a
sovereign bond by the rating agency. Investors assumed an implicit government guarantee
for the sukuk. The sukuks were rated A1 by Moody’s and A+ by Standard & Poor’s. The
Structure of the Nakheel sukuk were based on asset based Ijarah manfaa (Salah, 2010), in
which sukuk holders, via an SPV, buy the leasehold interest of the primary assets without
transferring the title of the assets to them. The sukuk holders only had rights on the
stream of income generated by the assets, and not on the assets themselves. Figure A.3
depicts the structure of the Nakheel Sukuk.
Figure A.3: Structure of Nakleel Sukuk
A.2.5.2.1 Reasons for Insolvency/Default
Following the global financial crisis 2007-09, the macroeconomic situation led the Dubai
government to seek a standstill for USD59 billion debt owed by the Dubai World, including
Islamic sukuk of 3.5 billion (Smith and Kiwan, 2009). There were various factors which caused
Dubai World to, in effect, default. Huge short term borrowings, falling oil prices, the bursting of
the real estate price bubble due to excessive supply of residential and commercial properties,
and a liquidity mismatch owing to short term liabilities and long term receivables from the
property development, all contributed to the failure of Dubai World (IMF (2010 )).
In the end, the sukuk’s default was triggered by the specific financial condition of the obligor.
For the first half of 2009, the company had a net exposure of AED 12.8 billion to the parent
company, Dubai World. It is more than likely that, if the concentration of funds in related
parties had been managed prudently, the standstill request for at least the Nahkeel sukuk
could have been prevented.
Sukuk Holders
Nakheel Developent Ltd.
(SPV/ Issuer/ Purchaser)
Nakheel Holding 1
LLC (Seller)
Nakheel Co.
3
Certificates
Sukuk Proceeds
Leasehold Rights Purchase Price
Funds
2
1
3 year lease of
Sukuk Assets
Nakheel Holdings 2
(Lessee)
4
Source: Wijnbergen and Zaheer (2013)