Bond dispute halts Shuaa trade

A battle over a Dh1.5bn convertible bond between the Dubai-based investment bank Shuaa Capital and the Government-owned Dubai Banking Group intensified today.

A public battle in Dubai over a Dh1.5 billion (US$408 million) convertible bond yesterday led to a halt in the trade of shares in investment bank Shuaa Capital. The dispute, between Shuaa and the Dubai Banking Group (DBG), involves a Dh1.5bn bond Shuaa issued to DBG in 2007. The market regulator was forced to intervene in the row yesterday after Dubai-based Shuaa said it was issuing 250 million shares to clear the debt, but DBG refused to accept them. The row has shaken the UAE's capital markets and underlined the impact that falling stock market prices have had on companies that borrowed heavily during the boom times using short-term convertible bonds. DBG, a unit of Dubai Group, said in a statement that it wanted Shuaa to pay the Dh1.5bn face value of the bond instead of offering shares, which at yesterday's opening price would be worth about Dh422.5m. Convertible bonds are shares in corporate debt that typically come with the option, and sometimes the obligation, for the buyer to accept shares instead of cash when they reach maturity. In good times, buyers of convertible bonds stand to book large profits, making money from regular interest payments and gaining more if the issuer's share price rises. But in bad times stock price declines can result in losses for investors if the conversion is mandatory, as Shuaa says is the case for its bond. Trading in Shuaa shares was halted yesterday on the Dubai Financial Market (DFM) pending a resolution to the dispute, after the shares rose almost 15 per cent. DBG has "elected not to convert the [bond] but rather to redeem [it] at its principal amount in accordance with the [bond] and applicable laws", it said in a letter yesterday to Essa Kazim, the DFM chairman. "We will not accept delivery of the conversion shares issued by Shuaa Capital ? and respectfully request you not to effect registration of any shares in Shuaa Capital in the name of Dubai Banking Group without our express consent." The DFM later issued a statement saying it would not register the shares in DBG's name until it received a joint communication from both companies. Abdullah Salem al Turafi, the chief executive of the Emirates Securities and Commodities Authority that regulates companies listed on the DFM, also sent a letter to Majid al Ghurair, the Shuaa chairman, stating that DBG and Shuaa would have to come to a formal agreement before a conversion could take place. The two companies have been wrangling over the bond since last October, when the Dh1.5bn DBG gave to Shuaa in 2007 was scheduled to convert into 250 million Shuaa shares. The debate now centres on whether Shuaa is legally bound to pay DBG back in cash or in shares. Shuaa says the bond is a mandatory convertible, while DBG contends that conversion is not mandatory, and has "demanded payment of the principal amount and other amounts payable", according to its letter. The continuing dispute sent ripples of confusion through Dubai's financial market yesterday, when Shuaa's shares rose in early trading by as much as 14.5 per cent before being suspended. "The stock started moving, was bidded up and then a series of news came out that Shuaa unilaterally put the shares to DBG, and then the big 800-pound hammer was that [DBG] wanted to redeem the note," said Ali Khan, a director at Arqaam Capital in Dubai. If Shuaa's shares had continued to trade, Mr Khan said, "you'd have seen the morning gains given back, perhaps with interest". Analysts said the debate between the two companies seemed to indicate that Shuaa was pressing its case for conversion of the Dh1.5bn bond in public and through legal channels, after private negotiations fell apart. Shuaa said in a statement released early yesterday that it had not been able to reach a settlement with DBG, despite strenuous efforts. "In the end it proved impossible for the company to achieve a resolution that bridged the differing expectations of the two sides," the statement said. "Shuaa's board unanimously concluded that no agreement could be reached on terms that they could recommend to shareholders." As the dispute progressed late last year and early into this year, Shuaa's board approved resolutions to extend the maturity of the bond until a settlement could be reached with DBG. Proposals included a further extension of the bond's maturity date and a reduction in the price at which DBG could convert. A lower conversion price would have reduced DBG's paper losses in the deal, while extending the maturity could have bought time for Shuaa's shares to rise back to 2007 levels. After a deadline for a final agreement passed on Monday with no resolution, Shuaa decided yesterday to move ahead and issue shares, prompting DBG's refusal. [e-mail] Mexican stand-off, b3