Dubai's Jebel Ali Free Zone is in talks with banks about how to repay its Dh7.5 billion ($2bn) Islamic bond due November, with most of the liability set to be rolled over using a syndicated loan and a new sukuk, sources said.
The Dubai government-owned free zone is in talks with Dubai Islamic Bank, National Bank of Abu Dhabi and Standard Chartered about how to meet the obligation, two sources told Reuters on Monday, although the banks have not been formally appointed to any role.
While details have not been finalised, the majority of the sum will be rolled over into new facilities, with a small amount coming from internal cash reserves.
"They are likely to pay back Dh500 million themselves, then raise as much as they can with a loan, and then get the rest from the sukuk," a banking source said.
"It is just discussions and there is nothing on paper yet ... but the way it was discussed was do the syndication first and then the sukuk. The sukuk maybe in September, after Ramadan, would be my guess."
A spokesman for Jafza declined to comment.
Jafza chairman Hisham Abdullah al-Shirawi told Reuters in December it was talking with financial institutions to refinance the Islamic bond and, while asset sales might be considered to raise funds, it would not need government assistance.
A request for proposals was sent out to banks two or three months ago by investment bank Rothschild, which is advising Jafza, the same source said, although some of the plan detailed in the document has now been amended.
No mandates for the sukuk have been awarded, according to two sources, with the potential for additional fee-generating business to be used as a carrot to attract as many banks as possible onto the loan, one of the sources said.
"If there is a loan element to the package, it would be interesting to see which banks currently have the capacity to extend balance sheet to Jafza and support the deal," said a Gulf-based analyst, who spoke on the condition of anonymity.
"There would be investor interest in a sukuk, because people like the Jafza model. But it all depends on what the company is willing to pay. In the current environment, Jafza is unlikely to price at the tighter end of pricing seen on recent deals from Dubai entities."
Jafza's November maturity has been highlighted in recent months as one of the biggest refinancing challenges in the Gulf region in 2012.
In a note to clients on February 1, Exotix said that without asset sales, government assistance or new debt, Jafza would face a $1.7bn liquidity shortfall at the maturity date.
"Although our base case remains that Jafza can repay the large $2bn sukuk, a potentially deteriorating economic and financing environment over the next year can pose large risks to Jafza from an execution and refinancing perspective," it said.
Jafza's last financial statement, for 2010, recorded cash reserves of Dh493.5 million.
Asset sales could increase the amount of capital Jafza has to assist in repayment. Sources told Reuters last month its parent company, Economic Zones World, a unit of Dubai World, was looking to offload its stake in British-based warehouse property developer Gazeley to do that.
The bid yield on Jafza's sukuk fell below 8 per cent for the first time since July on February 2 and has crept back up since. It was bid at 94.500 on Monday, to yield 9.77 per cent.
The original bond was managed by DIB and also Barclays, Deutsche Bank and Lehman Brothers.