By Shaheen Pasha and Rachna Uppal
DUBAI (Reuters) - Nakheel trade creditors will be offered a large-scale Islamic bond, or sukuk, as part of a debt restructuring plan, a source close to parent firm Dubai World said on Sunday, potentially boosting the region's sukuk market.
The Dubai government pleasantly surprised the market on Thursday when it offered to pay off Nakheel's <NAKHD.UL> upcoming Islamic bonds as part of a wider deal with Dubai World creditors, and offer trade creditors repayment through cash and a publicly tradable security.
That saved the real estate heavyweight from becoming the third high-profile sukuk borrower to formally default in the region, providing relief that could translate into more liquidity down the road.
"A large sukuk issuance will be a positive for the industry, but with Nakheel it's more an issue of putting this behind us," said a Gulf-based banker, declining to be identified.
"It's important to see a big sukuk, but for the Islamic finance industry from a psychological point of view avoiding another default is even more important."
Nakheel didn't elaborate on the form of security that would be offered, but is expected to make a separate statement regarding the deal soon.
The source close to Dubai World told Reuters that a sukuk was planned as it could reach a universe of investors from both conventional and Islamic financial institutions.
The size of the bond will depend on the total amount owed to creditors but it is too early to estimate given the difficulty the company and creditors are having in valuing Nakheel's assets, he said.
Discussions between Nakheel and its creditors will likely continue into April and possibly May, making it unlikely to see an issuance before June, the source said.
Trade creditors comprise Nakheel's suppliers of goods and services who were not paid immediately, but agreed to the company paying its bills according to various grace periods.
A spokesman for Dubai World <DBWLD.UL> declined to comment.
"The sukuk is proposed at this time, but other security structures are being considered as we want to ensure that the instrument is as liquid as possible for trade creditors," a spokeswoman for the Dubai government said on Friday.
The Nakheel restructuring plan fell under Dubai World's larger proposal to creditors to pay off about $26 billion in debt. Dubai World rocked global markets last November when it said it was unable to meet is obligations.
A $10 billion bailout in December from oil-rich neighbor Abu Dhabi prevented Nakheel from defaulting on a $4.1 billion sukuk.
While it was widely expected that Abu Dhabi would step in once again, the government of Dubai was Nakheel's savior last week, ahead of its May 13 sukuk payment of $980 million. Under the terms of the restructuring proposal, Nakheel will now be wholly owned by the Dubai government.
A Nakheel default would have served as another black eye for the Islamic finance industry, which experts said was already unfairly blamed for Dubai World's credit woes.
(Reporting by Shaheen Pasha and Rachna Uppal; Editing by Thomas Atkins and Will Waterman)