Shuaa and DBG settle bond dispute

Shuaa Capital and Dubai Banking Group ended a week of brinkmanship by agreeing to settle a long-running feud over a Dh1.5bn convertible bond.

Shuaa Capital chairman Majid al Ghurair said the deal was the 'best course of action' to remove the uncertainty between both companies.

Shuaa Capital and Dubai Banking Group ended a week of brinkmanship by agreeing to settle a long-running feud over a Dh1.5 billion (US$408 million) convertible bond, avoiding a potentially costly court battle. Shuaa, the region's oldest independent investment bank, agreed to let Dubai Banking Group take a 48.4 per cent stake, turning DBG into Shuaa's largest single shareholder. The deal sent Shuaa's shares soaring 14.5 per cent yesterday to close at Dh1.47, making DBG's stake worth Dh757m.

It came two days after DBG, a subsidiary of Dubai Holding, threatened to sue Shuaa to recover the face value of the bond. Yesterday, the pair reached a compromise that effectively split the loss resulting from the decline in Shuaa's shares since the bond was sold to DBG in 2007. Majid al Ghurair, the chairman of Shuaa, said: "We believe that this agreement was the best course of action under the circumstances and we worked swiftly to remove the uncertainty that followed the marked escalation over the past week."

Under the compromise struck between the two sides, DBG will receive 515 million shares for the Dh1.5bn convertible bond, which translates into a conversion price of Dh2.91 a share. The bond had originally been convertible at Dh6 a share, but DBG had insisted on Shuaa paying back the bond's nominal value instead of converting it into Shuaa stock. The arrangement means both sides bore some of the losses from the fall in the price of Shuaa's shares.

"Resolving things out of court is always better, especially if it works for both sides," said Khalid Howladar, a senior credit officer at Moody's. "If there is ambiguity in the law it is always better to resolve it. And as the financial system evolves there will ideally be less and less ambiguity." Shuaa had claimed that its bond contract superseded federal law, which gives the creditor the right to refuse the conversion of a bond.

DBG will become a long-term strategic investor in Shuaa, according to Fadel al Ali, the chairman of the banking group. "We believe that today's resolution of our differences is a significant milestone toward cementing Shuaa's position as one of the leaders in financial services in the UAE," he said. 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.

The threat of legal action and growing uncertainty about whether Shuaa would be forced to repay the bond led Moody's to downgrade Shuaa by three levels this week. The ratings agency may now reconsider the downgrade. The row between the two companies looked certain to escalate into a civil court case as late as Wednesday after DBG refused to accept shares in Shuaa to redeem the bond. Accepting the stock would have meant a book loss of more than Dh1bn for DBG because of the slide in Shuaa's share price over the past year.

The Dubai Financial Market called on the banks to find a mutually acceptable solution, while Emirates Securities and Commodities Exchange cited a federal law which gives the creditor the final say in deciding whether to redeem a convertible bond. The long-running dispute between Shuaa and DBG highlighted the dangers involved in issuing short-term debt in the expectation that rising markets would help borrowers pay back loans. Convertible debt issuances grew in popularity across the Gulf in recent years as soaring stock markets encouraged companies to offer their shares in return for debt. But the declines in share prices across regional markets caused by the global financial crisis has led companies to reconsider the strategy.