Emaar $2.45b sale plan risks higher cost

Emaar Properties’s plan to list 25 per cent of its retail business risks driving up borrowing costs for the Dubai developer that built the world’s tallest skyscraper.

By Samuel Potter (Bloomberg)

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Published: Tue 18 Mar 2014, 9:00 PM

Last updated: Sat 4 Apr 2015, 4:50 AM

While shareholders will be the primary beneficiaries of a sale that may raise as much as $2.45 billion, debt holders are set to miss out, according to Quantum Investment Bank Ltd and Emirates Investment Bank. Emaar will sell 25 per cent of the business, it said on March 15. The leasing and retail business contributed Dh3.29 billion ($896 million) to revenue last year, Emaar said in February.

“The cash is going to shareholders, instead of being retained or used to prepay debt,” Yaser Abushaban, executive director for asset management at Dubai-based EIB, which oversees more than $800 million of client funds, said by phone on Sunday.

“They’re selling a portion of the income generation associated with the business. That could impact their ability to service debt in the future, and the ability to add more.”

Emaar’s sukuk have been among the best performing in the Gulf Cooperation Council this year, returning investors double the average as the Dubai-based developer’s credit rating was raised by Standard & Poor’s and Moody’s Investors Service. Recurring revenue from assets including the world’s largest mall, where footfall rose 15 per cent to 75 million last year, helped secure the upgrades, the rating companies said.

The yield on Emaar’s Islamic bond due July 2019 tumbled 52 basis points this year to 4.03 per cent March 14, according to data.

The notes have returned investors 3.2 per cent this year, compared with an average 1.5 per cent for sukuk from the six-nation GCC, the data show.

“With this news there may be some widening on Emaar sukuk and for any future sales, it’s not really the same credit story,” Montasser Khelifi, senior manager for global markets at Quantum, said by phone on Sunday. “Divesting this division means Emaar returns to being more of a real estate developer.”

Emaar has substantial cash resources available to finance its maturing debt, while a significant expansion of retail space including at the Dubai Mall is expected to add to company cash flows, according to a spokesperson. Funds which should have been earmarked for shareholder dividends were used to build Dubai Mall so it is important to “enhance shareholder returns,” the spokesperson said by e-mail on Sunday.

Income from the retail and leasing business accounted for 32 per cent of Emaar’s revenue last year as profit climbed 21 per cent from a year earlier to Dh2.57 billion. Revenue from apartment sales jumped 43 per cent to Dh3.61 billion in the period, the company said on Monday.

Given the recovery in Dubai property prices and the company’s low leverage, the credit story remains strong, Khelifi and Abushaban said. Real estate prices in Dubai, one of seven sheikhdoms that make up the United Arab Emirates, may jump as much as 40 per cent this year, according to the Land Department. Emaar shares gained 1.5 per cent to Dh9.24 at midday in Dubai, poised for the highest close since August 2008.

“Emaar’s risk profile has declined,” Abdul Kadir Hussain, who oversees about $700 million in assets as chief executive officer of Mashreq Capital DIFC Ltd, said by phone on Sunday. “So them wanting to reward shareholders instead of paying down debt is understandable. I don’t expect a major reaction on the sukuk side.”

State-controlled Emaar owes more than Dh10 billion in bonds, loans and interest, according to data compiled by Bloomberg. Dubai reached an agreement with neighbouring Abu Dhabi and the UAE central bank to roll over $20 billion of debt, the state news agency reported on Sunday.

S&P raised the developer to investment grade in February, while Moody’s lifted it to the highest non-investment grade the same month. The company on March 15 also announced a 15-fils dividend and 10 per cent bonus shares for 2013.

“For most improving companies, there comes a point in time when upward momentum in credit improvement makes them more shareholder friendly,” Hussain said. “Debt holders have to make sure the company doesn’t get to a point when it jeopardises the credit quality.”

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