Rare activist investor showdown in the Gulf sees Dubai's Emirates REIT cancel debt restructuring plan

A major Dubai property investment fund is in the spotlight after its lenders blocked a debt restructuring plan and raised "serious concerns" about its transparency and governance. 

Dubai-based Emirates REIT was forced to withdraw a restructuring proposal for its $400 million dollar Islamic bond after a rare campaign of investor activism — something not commonly seen in the conservative Gulf region.

Emirates REIT, the largest Sharia-compliant real estate investment trust (REIT) in the United Arab Emirates, confirmed on Monday that it failed to get the 75% of shareholder votes needed to go ahead with the restructure, which would have included delaying the bond's maturity date by two years to 2024.

"Emirates REIT has therefore decided to rescind the voluntary offer and will continue to work on enhancing the capital structure for the benefit of all equity and debt holders within the REIT," it said in a statement on Monday.  

Commuters drive along Sheikh Zayed Road past commercial and residential properties in Dubai, United Arab Emirates.

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Sharia compliance means the funds or trusts in question are governed by the parameters of Sharia law and Islamic religious principles, which include prohibiting charging interest for profit, and forbidding investments that get a majority of their revenue from alcohol, gambling, pork, pornography, and weapons sales. 

A win for activist investors?

Eleven institutional creditors, including Scotland's Aberdeen Standard Investments, successfully campaigned to have the deal scrapped. The group in a June 2 statement said its opposition reflected the "serious concerns" that lenders had regarding "weak governance, cash leakage and continued lack of transparency" at Emirates REIT.

"What concerns me the most is the utter and complete lack of transparency from the company," said Ahmad Alanani, CEO of Dubai-based Sancta Capital, which was also part of the creditor group.

Dissenting creditors claim Equitativa, the REIT manager, failed to offer an explanation of the company's liquidity profile, its ability to repay at the proposed maturity, and provide information about an ongoing regulatory probe. Rothschild was among the institutions hired as advisors to the bondholders opposing the changes.

"What is the current status of the investigation with the regulator? What is the basis of the valuation of the assets of the REIT? What is the current liquidity position of the REIT? What is the business plan and forecast projections?" Alanani told CNBC's Capital Connection.

"The company provides a level of disclosure that can best be described as basic," he added.  

Equitativa rejected the groups claims and said it was cooperating with an ongoing probe by the local regulator, the Dubai Financial Services Authority. 

"I believe the company proactively and voluntarily put forward a straightforward transaction which was fairly and explicitly designed to enhance the tradability of the Sukuk," Arun Reddy, managing director at U.S.-based investment bank Houlihan Lokey, an advisor to Emirates REIT, said in a statement on Monday. Sukuk is the Arabic word for an Islamic bond, an instrument whose popularity has grown rapidly in recent years.  

Houlihan Lokey has said it is advising Emirates REIT on ways to improve its balance sheet, including a potential delisting from local exchange Nasdaq Dubai. 

Ratings agency Fitch late last month downgraded Emirates REIT's credit rating several notches from 'B+' to 'C', the final rating before a borrower defaults on its debt. Fitch said the firm's proposed bond alteration was a "material reduction in terms for lenders."

Jet skis pass by residential skyscrapers on the waterside in the Dubai Marina district in Dubai, United Arab Emirates, on Monday, June 8, 2020.

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Emirates REIT had asked debt holders to exchange their unsecured notes with a secured, but longer-dated, alternative, seeking to bolster its balance sheet in the face of a pandemic-induced property and economic slump in Dubai. 

Emirates REIT said a clear majority of voting Sukuk holders (57%) had voted in favor of its proposal. It also said there had been no default or any dissolution event relating to its debt. 

Its portfolio of residential, commercial and education assets was last disclosed to be worth $690 million. The company said it had the funds to pay its upcoming dividend payment — worth $10.2 million — to shareholders this month. Another payment is due in December.

'The UAE is not immune' 

The debt dispute comes as the UAE seeks to firm up its reputation as a business and financial hub in the wake of a number of high profile scandals, including the collapse of Abu Dhabi-based hospital operator NMC and the Dubai-based private equity firm Abraaj.

"The fact that the REIT and the REIT manager are under investigation really speaks to a level of oversight," Alanani said in defense of the local regulator. "The UAE is not immune to fraud or governance issues. This happens everywhere." 

"We need to sit in good faith, engage constructively with all stakeholders at the table, and find a way forward," he added. 

The UAE's economy — the Arab world's second largest — contracted by 6% in 2020, according to its central bank, while Dubai's economy contracted by roughly 11%, according to S&P. The ratings agency doesn't see the city's economy returning to pre-crisis levels until 2023.

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