In December 2006, Dubai's Nakheel Development Ltd issued the largest sukuk to date. The $3.52 billion sukuk was listed on the Dubai International Financial Exchange and is the largest sukuk ever issued. The money raised will be applied towards a capital injection into Nakheel PJSC, the company responsible for landmark developments such as The Palm, Jumeirah, and The World.
Nakheel is a subsidiary of Dubai World, a holding company that manages and supervises the portfolio of businesses and projects for the Government of Dubai. Other companies that Dubai World holds are Istithmar PJSC, an alternative investment house, and Limitless LLC, a real estate development entity.
The sukuk was structured as a sukuk
al-ijara. An ijara is a lease agreement under the Shariah and is a hybrid between an operational lease and a financing/capital lease.
The issuer used the proceeds of the sukuk issue to purchase a long-term leasehold interest in part of the land at Dubai Waterfront from an entity within the Nakheel group. The issuer then leased the land under the ijara to another Nakheel entity, with the rentals being used to make coupon payments to the sukuk holders. Dubai World has guaranteed the payment obligations due to the issuer.
Under Shariah, the obligations to insure and carry out maintenance of the land remain with the lessor and cannot be passed to the lessee under the ijara. However, the issuer appoints the lessee in a different capacity as its contractor to be responsible for such matters under a separate arrangement, passing the risk back to the Nakheel entity.
Upon redemption of the sukuk, the issuer has the right to require the lessee to purchase its long-term leasehold interest in the Dubai Waterfront land. The purchase amount payable is calculated in a manner that will be enough to allow the issuer to pay all amounts due to the sukuk holders upon redemption.
Robin Abraham and Shani Long