Ad-Hoc Group encourages all Certificateholders to exercise voting rights in respect to Emirates REIT Sukuk Consent Solicitation
Dubai: With a week to go before the final deadline for Certificateholders of Emirates REIT Sukuk Limited (“Emirates REIT” or “Company”) (the “Certificateholders”) to vote on the Company’s consent solicitation (the “Consent Solicitation”), the ad-hoc group of holders of the Sukuk (the “Ad-Hoc Group”) has called on all Certificateholders to exercise their voting rights in respect to the Consent Solicitation.
The Ad-Hoc Group, which officially represents 11 institutional investors from the GCC, Europe, North America and Asia, as well as UAE banks, considers that the deal should be enhanced and a number of longstanding issues should be resolved, for the benefit of all Certificateholders and shareholders alike.
In particular, the Ad-Hoc Group has highlighted a number of concerns relating to the Consent Solicitation to the Company. The key concerns relate to:
- Lack of transparency on (i) the operational, financial and liquidity position of the Company; (ii) ongoing breaches to transaction documents; (iii) ongoing litigation; (iv) regulatory investigations; (v) related party transactions; and (vi) valuation.
- Cash leakages via excessive management fees and operating costs.
- Legacy governance issues at the Company, which remain unaddressed.
- Inadequate downside protection for the Certificateholders, particularly in respect to security.
- Inadequate economics for the material risks that the Certificateholders bear.
The Ad-Hoc Group represents over 30% of Certificateholders – giving it a blocking position to the Consent Solicitation and a blocking majority to enforce. Moreover, it considers that the majority of Certificateholders – 55% (with only 75% of the 60% of Certificateholders who have voted to date in favour) – remain opposed or have yet to vote, demonstrating the lack of support for the Consent Solicitation despite the deal being structured to incentivise early voting.
Nevertheless, the Company has failed to respond to the Ad-Hoc Group’s concerns or resolve any of these issues, with the initial timeline for a response (to share an information pack to enable full due diligence) set by the Ad-Hoc Group for June 1. The Ad-Hoc Group has voted against the deal in order to allow for enhanced terms for all Certificateholders to be negotiated.
On Tuesday 18th May, Emirates REIT Sukuk Limited (“Emirates REIT” or “Company’) launched a consent solicitation (the “Consent Solicitation”) in respect of its outstanding US$400,000,000 Certificates due 2022 (ISIN: XS1720817540) (the “Sukuk”).
On 25th May, Fitch downgraded Emirates REIT to ‘C’, the lowest rating before a borrower defaults on its debt and Fitch described the Consent Solicitation as a “material reduction in terms for lenders”, thereby highlighting the significant extent of its concerns.
The Ad-Hoc Group represents over 30% of Certificateholders who are against the Consent Solicitation and consider that the deal should be enhanced and a number of longstanding issues should be resolved. If the longstanding issues are resolved, this would be to the benefit of both Certificateholders and shareholders.
Overview of the Company’s Consent Solicitation
The Company is asking Certificateholders to:
- Extend the maturity from Dec-22 to Dec-24, without any explanation of the Company’s liquidity profile or its ability to repay the sukuk at the proposed maturity.
- Defer coupon payments for Jun-21 and Dec-21, amounting to $20.5m, with such amount being paid at maturity in Dec-24. No interest is being offered to Certificateholders on such amount during the deferral period. Equitativa, the REIT manager, is intending to continue to pay itself significant management fees in 2021, while Certificateholders would not be paid any coupon under the Company’s proposal.
- Waive all past and ongoing defaults to Transaction Documents, with no explanation what defaults have taken place and the level of materiality.
- Loosen controls in the financing documentation in respect to ability to incur incremental debt and incremental security, in spite of the risk profile of the Company being significantly higher than when the Certificateholders invested in the Sukuk.
In return for these asks, the Company is offering Certificateholders:
- $280m security within 120 days post Closing albeit there is no default provision if the security is not put in place.
- A consent fee of 100bps for consents by 26th May and a reduced fee of 50bps for consents by 9th June.
Ad-Hoc Group’s view of the Company’s Consent Solicitation
The Ad-Hoc Group articulated its concerns relating to the Consent Solicitation in a letter to the Company on 26th May 2021. This letter articulates the primary concerns of the Ad-Hoc Group as being the following:
- Certificateholders are not being adequately compensated for the deterioration in the credit profile of the Company.
- An inadequate security package offered to the Certificateholders, to the extent the Consent Solicitation is successful. The Ad-Hoc Group believes there is likely in excess of c.$190m incremental unencumbered assets that should be provided to the Certificateholders as security. In addition, a registered second mortgage could also be provided over the assets held as security by the senior secured lenders (DIB and Ajman Bank).
- A lack of trigger if the relevant mortgages (forming part of the aforementioned security package) are not registered within 120 days. At present, there are no implications for the Company if it does not register the mortgages as part of the security the Company is offering.
- Lack of transparency on (i) the operational, financial and liquidity position of the Company; (ii) ongoing breaches to transaction documents (iii) ongoing litigation; (iv) regulatory investigations; (v) related party transactions and (vi) valuation.
- A lack of equal treatment and burden sharing with other creditors, especially the lack of visibility on concessions being made by secured bank lenders and an absence of any context from the Company, leading to the inference that secured bank lenders are making no concessions at all.
- The waiver of past and ongoing “Dissolution Events” (as defined in the underlying terms and conditions of the Sukuk) and possible breaches to the relevant Sukuk transaction documents, without the provision of any context with respect of such defaults.
- Lack of clarity on the status and potential implications of the ongoing Dubai Financial Services Authority (“DFSA”) investigation into the Company.
- A poorly timed Consent Solicitation process (particularly if this is an ‘optional’ process, as the Company is insistent in articulating to the media), in the context of the ongoing DFSA investigation into the Company.
- Structural seniority of payment of Equitativa’s management fees, while creditor profit payments are deferred. A comparable analysis of other REIT management fees would indicate that Equitativa has taken out in excess of $50m which could have been applied to dividends for shareholders and/or supporting investment and/or providing adequate liquidity.
Ad-Hoc Group’s view of the Results of the Early Documentation Review Deadline
The Company has announced that 60% of the Certificateholders cast their vote before the early document review fee deadline, with 75% of those votes in favour of the Consent Solicitation. The conclusion is that the majority of Certificateholders representing 55% remain opposed or have not voted, demonstrating the overwhelming concerns that Certificateholders have with the proposal presented by the Company. With that backdrop, the early vote results appear far from encouraging, especially given the consent fee is structured to incentivise early voting, and validate the Ad-Hoc Group’s view that the majority of the Certificateholders remain unsupportive of the proposal as of the Early Participation Deadline.
The Ad-Hoc Group is prepared to work to reach a quick and efficient resolution. As a result, and as articulated in a press release of 26th May and reiterated on 27th May, the Ad-Hoc Group would welcome the Company and its advisors to work alongside the Ad-Hoc Group’s financial and legal advisors to develop revised proposals. The Ad-Hoc Group is disappointed and surprised by the approach the Company has taken thus far, notably the Company’s lack of willingness to engage in a conventional negotiation over terms with its investors, as would be typical in such a situation.
The Ad-Hoc Group also believes that the improvements to governance and mitigating actions to cash leakage would be to the benefit of all shareholders and Certificateholders.
The Ad-Hoc Group welcomes contact with other Certificateholders and invites Certificateholders to make themselves known to Rothschild & Co at the contact details below.