State-owned Nakheel, developer of three palm-tree shaped islands off Dubai's coast, has set pricing for almost $1 billion of Islamic bonds, the largest such sale this year, arrangers said.

The two-year bonds are worth 3.6 billion dirhams ($980.4 million) and were priced at 225 basis points above the six-month Emirates Interbank Offered Rate (EIBOR), the bottom end of previously indicated price guidance, arrangers said.

Six-month EIBOR is currently at 2.05 percent, down from 4.46 percent in January as the United Arab Emirates has slashed its benchmark interest rate in tandem with US Federal Reserve rate cuts to maintain the dirham's peg to the dollar.

Earlier this month, Nakheel chief financial officer Kar Tung Quek told Reuters the bond sale was to finance expansion. The developer has held at least three Islamic bond sales, including one worth $3.52 billion in 2006, the world's largest.

The sukuk are denominated in dirhams, highlighting investor appetite for Gulf Arab securities on speculation countries in the region may revalue their currencies -- currently pegged to the falling US dollar -- to stave off rising inflation.

The sale is one of only a handful in the Gulf so far this year after the US subprime mortgage crisis triggered a global credit crunch, making banks and investors reluctant to lend.
Higher borrowing costs prompted sukuk sales to be postponed.

But in recent weeks air conditioning firm National Central Cooling Co, mammoth chemicals firm Saudi Basic Industries Corp and Kuwaiti real estate firm Gulf Holding Co have sold sukuk or plan sales.

Dubai Islamic Bank, JPMorgan Chase & Co and Dubai-based Emirates NBD arranged Nakheel's latest sukuk on an ijara, or leasing structure, basis.

Islam bans the receipt of interest, and sukuk returns are derived from underlying physical assets which typically pay a rent or profit to bondholders. - Reuters