Moody’s downgrades Shuua Capital

DISCUSSIONS CONTINUE: Dubai Banking Group chairman Ahmad Bin Byat. (Getty Images)

Moody's Investors Service on Monday downgraded the long-term foreign and local currency issuer ratings of investment bank Shuaa Capital by three notches to B1 from Ba1 and placed them on review for further possible downgrade.

The ratings downgrade represents a one-notch reduction in the standalone rating of Shuaa and the elimination of the two-notch uplift previously given on account of potential parental support considerations.

The agency said its rating action was prompted by the growing uncertainties surrounding the conversion by Dubai Banking Group (a subsidiary of Dubai Group) of senior debt into equity in Shuaa.

DBG has refused to accept the shares that Shuaa issued in relation to a AED1.5 billon (US$408 million) convertible note and has requested to be redeemed in cash.

Although the legality of this request appears unclear, given the terms in the 'original note certificate', Moody's says it believes that Shuaa's creditworthiness is subjected to considerable threat if DBG's decision becomes enforceable, giving rise to a significantly higher risk of default.

In addition, the agency said it is concerned that Shuaa's access to liquidity could be negatively affected by the extended public wrangling over the convertible note. Cancelable bank lines make up an important part of Shuaa's funding.

On the other hand if the dispute is settled shortly and the notes convert into common equity, Moody's says it will consider the rating of Shuaa based on the facts at that time.

According to the original note certificate, the note was supposed to have been converted into 250 million shares in Shuaa's equity on October 31 2008, giving DBG a direct ownership stake of 32%.

Following disagreements as to the terms of the conversion, the two parties signed an agreement on November 2 2008 to extend the maturity date for a year to October 31 2009 (extendable to October 31 2010), subject to certain conditions.

Since then, the two parties are believed to have been in negotiations regarding the conversion terms, although there has been a recent escalation in the dispute between them, as covered in the media.

Moody's previous rating action on Shuaa Capital was implemented on April 16 2009, when the rating was downgraded by two notches to Ba1, reflecting the company's deteriorating fundamentals. The outlook on the ratings was negative.

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