Now that Emaar Properties has written off its Dh172 million investment in Dubai Bank, investor attention is turning to the prospects of its much larger stake in Amlak, the troubled mortgage company.
Dubai's largest developer owns 45 per cent of Amlak, an investment valued at Dh795m (US$216.4m) in the property company's quarterly report released this week.
"That is definitely the next question mark," said Majed Azzam, a Middle East analyst for Alembic HC Securities. In a note to investors yesterday, Alembic warned that Emaar may be forced to write down its entire stake in Amlak this year.
"An impairment of Amlak this year now appears more probable and it is unlikely that the Government will intercede with a bailout that will benefit Emaar," Alembic said.
On Monday, the Government assumed control of Dubai Bank and announced plans to inject more capital into the operation, which was hard hit by the downturn in Dubai's property market.
Fitch Ratings, one of the world's largest credit ratings agencies, yesterday downgraded Dubai Bank's individual rating to "F" from "D/E".
The downgrade "reflects Fitch's view that Dubai Bank would have failed and it needed external support," the agency said yesterday. Speculation is now mounting that the Government will take similar action with Amlak.
The Government suspended trading in Amlak and its fellow mortgage provider Tamweel in 2008.
Tamweel resumed trading last week, with more than 400 million shares changing hands in a flurry of activity. The price eventually rose 6.8 per cent, after an initial sell-off.
The Government is still in the process of restructuring Amlak, which last week reported a net loss of Dh53.9m for the first quarter, compared with a Dh3.1m loss in the same period last year.
Emaar is "not in a position to assess its investment [in Amlak] for any impairment pending the recommendations from the Governmental Committee", Emaar reported in its filing this week. In addition to its Dh795m stake, Emaar is owed Dh689m from an outstanding unsecured loan to Amlak. In its filing, Emaar said management believed the loan was "fully recoverable".
Amlak paid down Dh214m on the loan last year.
Analysts disagree on whether the Government will take over a 100 per cent stake in Amlak in the same way it did Dubai Bank, which wiped out shareholders' value.
"I'd be very surprised if is total dilution" for Amlak, said Chet Riley, an analyst with Nomura Securities.
Mr Riley expects the Government to take a 50 per cent stake in Amlak, diluting the shares but not eliminating shareholder value. Emaar will eventually take a Dh500m impairment on its Amlak stake, Nomura predicts. Mr Riley said Nomura long ago removed any value for Amlak from Emaar's forecasts. He said any write-down would be better than calling for Emaar to stay involved.
This year Emaar reportedly declined a proposal to turn its debt with Amlak into equity, a decision that was welcomed by investors.
"One of the things we look for is that Emaar doesn't have to inject further equity" into Amlak, Mr Riley said.
There is little long-term value in Amlak, Alembic noted. Amlak is carrying about Dh4 billion worth of property on its balance sheet at the original acquisiti0on costs.
When those assets are adjusted for declines in the Dubai market, it will "completely wipe out the company's equity of Dh1.5bn", Alembic said.