Shuaa row a test for regulators

Shuaa's stock fell 4.7 per cent yesterday as the investment bank's largest shareholder warned that its public feud with Dubai Banking Group over a Dh1.5 billion (US$408 million) convertible bond will test the UAE's regulatory regime. The dispute between Shuaa and the Dubai Banking Group (DBG) involves the bond that Shuaa issued to DBG in 2007. The market regulator was forced to intervene in the row on Tuesday, suspending trading in Shuaa stocks after the Dubai-based bank said it was issuing 250 million shares to clear the debt - but DBG said it would refuse to accept them.

"This episode is certainly a test of regulatory and market structures in the UAE," said Florence Eid, the managing director at Passport Capital, a US-based investment manager that owns 14.2 per cent of Shuaa and manages about $2.4bn in funds. The row has shaken the UAE's capital markets, underlining the impact that falling stock market prices have had on companies that borrowed heavily during the boom, while focusing attention on the legal enforceability of convertible bonds when disputes arise between lender and borrower.

"Growing pains are common in emerging markets, and must be put in perspective. Whoever thinks the Dubai market is not an emerging market is fooling themselves," Ms Eid said. "We are confident that the system will pass the test and achieve a higher level of sophistication in the process." DBG said in a statement that it wanted Shuaa to pay the Dh1.5bn face value of the bond instead of offering shares, which at Tuesday's opening price would be worth about Dh422.5m. Accepting the shares would equate to a paper loss of more than Dh1bn for DBG.

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 dispute centres on whether Shuaa can force DBG, a subsidiary of Dubai Group, to accept shares instead of repaying the bond that was issued in 2007. Shuaa says the conversion of the bond is mandatory. The note certificate outlining the conditions of the bond obtained by The National states that "on maturity date the notes shall be converted into shares ? either at the option of the issuer or the holder".

Lawyers say the two parties may need to bridge differences between the terms they agreed to when the bond was issued and the relevant legislation cited by the market regulator. "Everything goes back to the original memorandum," said Walid Jaafar, the head of the corporate department at Fichte & Co, a legal consultancy. "Everything - the conditions, the time frame and whether it is mandatory or not - should be laid out, because as an investor I want to know my return."

The Emirates Securities and Commodities Authority refers to UAE law, which it says gives the bondholder the last say in transferring bonds into shares. "When the conversion is decided, the bond owner is free to either approve the conversion or receive the nominal value of the bond," states Federal Law No 8, of 1984. On Tuesday, Shuaa Capital shares initially rose 14.5 per cent on the news that the bank had issued shares to DBG, before trading was suspended.

uharnischfeger@thenational.ae