The Dubai Banking Group (DBG) says it plans to sue Shuaa Capital to recover Dh1.5 billion (Dh408 million) that it claims is owed under a disputed convertible bond. The escalation of the row into a legal confrontation capped a miserable day for Shuaa shareholders as the bank's stock fell more than 9 per cent after Moody's downgraded its credit rating.
"DBG has made several attempts to amicably resolve the matter of Shuaa's bond issue. We believe that our proposals were in the best interest of both parties," said Fadel al Ali, the bank's chairman. DBG said it would file the civil case with the Dubai Court. The row between Shuaa and DBG, a subsidiary of Dubai Holding, has shaken the UAE's capital markets. The group wants Shuaa to pay the Dh1.5bn face value of the bond issued in 2007, instead of converting it into Shuaa shares. Since the bond was issued, Shuaa's stock has lost about two-thirds of its value, and accepting the shares would mean a paper loss of more than Dh1bn for the banking group.
Shuaa has rejected the claim. "This is not an unexpected development, as DBG had earlier indicated its willingness to file such a claim. This is their right as in the case of any commercial dispute. We believe in the rule of law," said Majid al Ghurair, the chairman of Shuaa. The Emirates Securities and Commodities Authority, the stock market regulator, has said that under federal law the owner of a convertible bond "is free to either approve the conversion or receive the nominal value of the bond". But Shuaa maintains the bond certificate gives it the right to convert the bond, even against the creditor's will.
"This is actually a crucial event for the legal and investor regime here in the UAE. It's relatively immature and it's the first time we see these types of legal disputes on such a scale," said Khalid Howladar, the senior credit officer at Moody's. Moody's Investor's Service downgraded Shuaa on Monday, citing growing uncertainties over its creditworthiness and heightened risk of default. It lowered its rating three notches to "B1".
"These are stressful times with large sums at stake. Hopefully, after inspecting the relevant contracts, the courts will rule appropriately and set a precedent for fairness and transparency that any financial centre needs to establish its credibility," Mr Howladar said. Mr al Ali said the DBG was "disappointed" by Shuaa's attempts to "force conversion of the bond, without prior warning, consultation or agreement".
The dispute escalated last week when Shuaa asked the stock exchange to issue 250,000 shares to DBG, which would give the banking group a 32 per cent stake in Shuaa. The bank said it would reject the shares, while the Dubai Financial Market said it would not register them unless both parties agreed. Mr al Ali said the DBG had "no choice but to pursue litigation in order to redeem our original investment". The bank said it would also seek outstanding interest payments.