Shuaa and DBG settle dispute

The long-running dispute over a convertible bond between Shuaa Capital and Dubai Banking Group (DBG) ended amicably yesterday when the investment bank's shareholders voted in favour of a compromise. The agreement allows Dubai Banking Group to delay by one year the conversion of a mandatory bond into shares originally due last October, because of Shuaa's declining share price. "It is the best decision under the circumstances," said Iyad Duwaji, the chief executive of Shuaa Capital. "It is in line with what the board had recommended to its shareholders."

However, shareholders rejected a second resolution which would have added three Dubai Banking Group members to Shuaa Capital's board. Some analysts had warned that Shuaa's risk profile would deteriorate if the bond was not converted because the convertible shares would be treated as debt rather than equity. But Mr Duwaji said the convertible bond was treated as equity in Shuaa's most recent accounts and he did not see any reason for that to change. "For now it is part of our equity," he said. In early December, HSBC said in a research note that Shuaa's debt was 0.5 times its equity, but that this could surge to 2.5 times in case of non-conversion.

The Dubai Government-owned DBG is a Sharia-compliant investment company and part of Dubai Holding's Dubai Group. The conversion is postponed by one year, but the two parties could extend it by another year if they agree. The dispute centres on a Dh1.5 billion (US$408 million) convertible bond. In 2007, DBG pledged to take a 32 per cent equity stake in Shuaa by converting the bonds into shares on Oct 31 last year. The conversion was set at an agreed price of Dh6 per share, which equated to 250 million shares of Shuaa. In October, Shuaa's share price had fallen to about Dh2.70 and DBG decided not to convert, claiming the bond was not mandatory.

Shuaa Capital, the largest domestic investment bank in the Emirates, posted a net loss of Dh577.4m in the final quarter of last year, according to a statement by the firm. [e-mail]