Emirates REIT is racing against the clock to sell assets and pay down its US$304.73m sukuk so that it can extend the instrument’s maturity by 12 months

The United Arab Emirates real estate investor is attempting to extend the sukuk because raising funding for a straight refinancing has proved a struggle. However, for the extension to take place, the outstanding must be reduced to US$230m.

Emirates REIT provides a rare example of a stressed sukuk issuer in a market dominated by highly rated sovereign and bank credits. Less than 0.25% of all sukuk ever issued have defaulted, according to Fitch, and 81% of sukuk rated by Fitch have investment-grade credit ratings. Emirates REIT currently holds no credit ratings.

But the trust’s fortunes could soon turn. In July, Emirates REIT sold its Dubai Trident Grand Mall, raising Dh74m (US$20.15m), and a second asset sale should raise the cash it requires to cut the size of the Islamic bond down to the trigger level.

“We are in the process of selling another asset and I believe we will be below the US$230m threshold before December 12,” Thierry Delvaux, chief executive officer of Equitativa, the manager of Emirates REIT, told IFR. “We are very advanced on the second asset sale and that will essentially take us there.”

The sukuk reaches its original maturity on December 12, by which point the size needs to be US$230m or lower if it is to be extended.

The company felt it necessary to announce its intention to exercise the extension option because efforts to refinance the instrument were coming up short. In recent years Emirate REIT’s credit metrics have suffered from a downturn in the commercial real estate market and a rapid rise in interest rates.

When market sentiment was at its poorest, Emirates REIT had to refinance a US$400m sukuk, and in 2022 entered into what Fitch, which at the time rated the issuer, deemed to be a distressed exchange. The size was reduced to US$380m and has since been whittled down to the current US$304.73m, but the profit rate increased from 5.125% on the original sukuk to 9.5% and has since increased again to 11%.

“With everything that Emirates REIT had to go through over the last couple of years with Covid, which hurt the office market – and our portfolio is largely made up of office buildings – and the interest rate crisis, it has been challenging to handle those very expensive coupons,” Delvaux said.

Should the 12-month extension be enacted, the profit rate will lift again, this time to 12.25%. But the extension would give the company the breathing space it needs, and should funding become available, it could still choose to refinance the instrument in its entirety. The company has been exploring a number of options, including bank financing, issuing new sukuk and selling assets.

The outlook for the credit is in fact more positive than the high cost of its existing sukuk and the drawn-out refinancing process suggest.

“The company’s financials have improved markedly due to a rebound in the Dubai property sector and the company has improved liquidity after selling certain assets,” said a sukuk investor. “And its much stronger financial position does increase the possibility of a successful refinancing.”

A trader also said that he’d seen demand from Middle East private banks, who had been buying up small chunks of the sukuk because they liked the high profit rate and outlook for the credit.

“I like the credit overall,” a sellside credit analyst said. “But an important question is, what happens if they don’t sell those assets or raise funds to reduce the outstanding in time?”

While very much a worst-case scenario, it is still a reasonable question for the market to be asking.

“There are solutions to help us avoid getting into that situation,” said Delvaux. Emirates REIT could access bilateral financing linked to individual properties that would enable it to raise enough cash to get the sukuk down to US$230m.

If the sukuk is extended, it will still need to be repaid or refinanced in December 2025. The hope is that by then Emirates REIT's finances will have improved to such an extent it could access the sukuk sector or raise the money from other sources, such as the bank market.

Source: IFR