Emaar Properties has approved a plan to enable holders of its convertible bonds to turn the notes into equities in a move that could ultimately create about 419.3 million new shares.
At a meeting on Tuesday, Emaar’s board agreed to requests from two bondholders of its US$500 million five-year bond to convert a first tranche of debt into 18.7 million shares.
In a statement confirming the decision to the Dubai bourse today Emaar announced its board had agreed to requests and would allow other bondholders to do likewise.
“The board of directors … decided to approve the increase of the company’s share capital by issuing 18.7 million shares for the account of the note holders as per the conversion notices received and to approve all similar conversion requests that may be received by the company in future,” said Ayman Hamdy, Emaar’s legal executive director.
The decision is likely to trigger a spate of similar conversions as others follow suit, netting bondholders, who bought into the five-year bond in 2010 in the aftermath of the financial crisis, returns estimated to stand as high as 70 per cent.
According to Bloomberg data, if all the bonds are converted, Emaar’s total 6 billion shareholding will increase by 6.5 per cent.
Analysts, concerned about the dilution effect, expressed relief that the extra shares were to be issued in stages rather than in one go.
“Clearly this is a more positive outcome than some had been expecting,” said Talal Ghandour, the managing director and co-head of equities for the Middle East and North Africa at Bank of America Merrill Lynch. “However, I would caution that Emaar wasn’t exactly under pressure in the last week. So expect a small relief rally but nothing more than that.”
After falling 3.2 per cent on Monday and 0.7 per cent on Tuesday following the news that the board was meeting to discuss the conversion, Emaar shares rallied 2.2 per cent yesterday to reach Dh7.25.
The company, which built Dubai’s Burj Khalifa, has announced a number of large and costly projects in recent months. These include a 13.63 million square metre golf course and villa development, which it plans to build on Dubai World Central land close to the Expo 2020 site.
The Lagoons, a 6 million square metre mixed use project around a 40-hectare lagoon, which Emaar is developing with Dubai Holding; and a $545 million canal to be built in Downtown Dubai are among the other projects.
“The move will reduce Emaar’s debt ratio, which is positive for the company,” said Tariq Qaqish, the head of asset management at Al Mal Capital. “The challenge, however, will be for Emaar to generate decent returns for shareholders on that basis.”
“Equity is the most expensive form of capital to raise,” said Saleem Khokhar, the head of equities at National Bank of Abu Dhabi’s asset management group. “By boosting the company’s balance sheet, it should make it easier for the company to fund its future ambitious projects.”