The public feud between Shuaa Capital, the investment bank, and its creditor, the Dubai Banking Group (DBG), over a Dh1.5 billion (US$408.6 million) convertible bond has all the ingredients of a financial soap opera, sending Shuaa’s shares up, then down, and finally forcing the market regulator to intervene in the dispute last week.
The saga also focused investors’ attention on the legacy of short-term convertible bonds and other debts that were sold in the boom and are approaching maturity at a time of reduced liquidity and weaker economic confidence.
“Last year, it made sense for everyone here to borrow as much as they possibly could,” Youssef Nasr, the chief executive of HSBC Middle East, told a recent Moody’s credit conference in Dubai. “It was basically a play against very negative interest rates.”
But a funding strategy that once made sense amid rampant economic expansion – taking out one short-term loan after the next, when rates were cheap and offerings abundant – is now causing chief financial officers sleepless nights across the region.
The struggle between Shuaa and the DBG highlights the vulnerability of companies who raised short-term funds using debt that now need to be redeemed or rolled over. Should the DBG, part of Dubai Holding, get its way, Shuaa will be forced to pay back the Dh1.5bn it borrowed so easily in 2007 when oil-fuelled confidence in local markets was at a peak. If Shuaa has its way, the DBG will have to accept the terms of the original deal and convert the bonds into Shuaa shares instead.
The shares are worth substantially less today than they were 18 months ago when the bonds were issued.
Georges Makhoul, who heads the Middle East and North Africa operations of Morgan Stanley, says the mismatch caused by short-term finance paying for long-term projects is the nub of the problem.
“It is the type of leverage and how you use it that gets you into trouble,” he says. “Infrastructure projects like the ones undertaken here in the region should not be financed with short-term leverage and bank lending, but instead funded with long-term infrastructure type of bonds and leverage that would run up to 30 and 40 years.
“What you need now is the restructuring of the existing leverage. If the returns are long term and you fund with short-term debt, then you face this crisis every year where you wonder how you are going to pay for it.”
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