Rare activist investor showdown in the Gulf sees Dubai’s Emirates REIT cancel debt

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.

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.”

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