A disagreement between Dubai-based investment bank Shuaa Capital and the government-linked Dubai Group over the terms of a convertible bond issue has the potential to undermine Dubai’s position as an investor-friendly hub in global capital markets, analysts said this week.
The two sides are arguing over the terms of a Dh1.5bn ($408m) convertible bond sold by Shuaa to Dubai Group, a subsidiary of Dubai Holding — owned by the emirate’s ruler Sheikh Mohammed bin Rashid Al Maktoum — in 2007.
When the convertible matured a year later and Shuaa’s shares were trading well below the Dh6 strike at Dh2.7, Dubai Group refused to convert the bond into shares. It said that conversion was not mandatory, and therefore demanded full cash redemption of principal and interest. Shuaa claims that conversion is mandatory.
After private discussions hit a brick wall, the tortuous negotiations spilled into the public domain this week. Shuaa Capital called on the capital markets authority to issue 250m new shares to Dubai Group, giving it a 32% stake.
Analysts doubt Shuaa Capital has enough cash to redeem the bond in full. The Dubai Financial Market authority suspended trading in Shuaa shares on Wednesday.
The dispute highlights the pitfalls of short term convertible bonds in the grip of falling stock prices. But analysts say the dispute has broader consequences.
"This is really, really terrible news," said a portfolio manager at a Gulf asset management company in Dubai. "This has the potential to seriously undermine the image of Dubai from the perspective of foreign investors."
He said he was concerned Dubai’s reputation for protecting investor rights would be undermined if local authorities were seen to be favouring Dubai Group in the dispute, due to its sovereign-backed status. "This is beginning of the road in Dubai’s quest to establish independent capital market authorities and so we have to see what happens," he said.
Electrobras ups target to $1bn
Brazilian power firm, Eletrobras, has finished investor meetings in the US this week via Credit Suisse. The borrower initially sought to issue $600m of 10 year notes but new chief financial offer, Astrogildo Quental, is now seeking a $1bn transaction for either a five, seven or ten year issue, said a market source. The state-owned company is looking to follow in the footsteps of development bank BNDES which issued a competitively priced $1bn 6.456% bond at the beginning of the month while investor appetite for Brazilian risk remains strong, said analysts. Mexican homebuilder Javer has also mandated Credit Suisse for an upcoming dollar benchmark.