Emaar bondholders seek 70% returns on exchange

Investors who bought Emaar Properties PJSC’s convertible bonds in the midst of Dubai’s real estate decline three years ago are triggering an exchange that would generate returns of more than 70 per cent.

Emaar’s board was to meet on Tuesday to approve the conversion as required by statute, a spokesperson said by email on Monday. The $500 million bond due in 2015 would be exchanged at a price of Dh4.38. The stock was priced at Dh7.1 as of 1:38pm on Tuesday.

Emaar, which built the world’s tallest tower, almost doubled in Dubai trading this year as the retail, tourism and housing markets rebounded.

The conversion would lead to the creation of around 420 million new shares, representing a six per cent to eight per cent dilution of existing holders, Taher Safieddine, an equity analyst at Shuaa Capital PSC, estimated.

“Investors who bought the bond at issuance would be rewarded handsomely for taking on the risk when Dubai looked to be down and out,” said Julian Bruce, head of institutional trading at EFG-Hermes UAE Ltd in Dubai. He estimated total return of more than 74 per cent, which is “very good by anyone’s standards”.

The total return would include coupon payments that have already been collected, on top of the conversion rate.

Bondholders have had the right to call for the conversion since January 30, 2011. Emaar’s stock has gained 130 per cent since then. The developer would first gain the ability to force a conversion on December 20, allowing the company to pay the bond back at face value rather than issuing the shares.

“Typically an investor doesn’t convert until the last day because it’s in his benefit to delay as much as possible,” said Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd. “However, issuers of convertible bonds put these provisions in because they don’t want to give the investors a free ride forever.”

While the bondholders instigated the swap, it would also benefit Emaar through a reduced debt burden and lower interest costs, Shuaa’s Safieddine said. The bond pays 7.5 per cent interest annually, representing about five per cent to six per cent of the developer’s estimated 2013 net income, he said.

“This is a win-win situation,” Mashreq’s Hussain said. “For Emaar, the conversion makes perfect sense because it would remove debt from the balance sheet. For investors, the fully diluted earnings per share would take into account the conversion of this bond, so it wouldn’t have an impact.”

The bondholders could either opt to sell the shares to realise an immediate gain or bet on their continued rise.

Goldman Sachs & Co analyst Eyad Faraj has a 12-month Emaar price estimate of Dh8.85, while JP Morgan Chase Bank’s Muneeza Hasan predicts of Dh8.5. Mohammad Kamal, a real estate analyst at Arqaam Capital Ltd, rates the developer “buy” with a price target of nine dirhams, data compiled by Bloomberg shows.

Even after the gains this year, Emaar shares are far short of the peak of Dh15.70 at the start of 2008. While the company avoided losses suffered by most of its peers, net income plunged in the two years prior to the 2010 bond sale when Dubai property values dropped as much as 65 per cent.

While a conversion dilutes the holdings of existing investors, the prospect of earnings growth may reduce its significance. Emaar is expected to report full-year net income of Dh2.3 billion ($634 million), according to the mean estimate of 12 analysts in a Bloomberg survey. The figure was Dh2.1 billion last year.

The share gains show investors are more optimistic about the company’s growth prospects than concerned about possible dilution, Safieddine said.

“The shares are continuing from strength to strength, especially with the possibility of a spinoff of the malls and new project sales as well as work with key players in the market for the World Expo 2020,” he said.