UAE shareholders are no longer staying on the sidelines

Dubai: Shareholders in publicly listed UAE companies are no longer willing to remain unheard. If pushed to the wall, they are even ready to pull the plug on the business.

After months of speculation over its future, investors in loss-making Marka Holding on Wednesday decided they are better off liquidating the retail and leisure group rather than pump in more funds in the vain hope of reviving it. Or else, wait for a “strategic investor” to come to the rescue. Instead, more than 90 per cent of shareholders decided enough was enough.

The board of directors at the company — whose 2014 IPO was oversubscribed 36 times — will formally launch bankruptcy proceedings. “The next step would be to submit a plan to the court, which would then appoint a trustee to oversee the liquidation process with creditors/shareholders,” said Nasser Malalla Ghanem, Senior Partner at the law firm of NM Associates. “The trustee prepares an inventory and in consultation with creditors will liquidate the assets.”

Marka came to market at a time when rents and valuations in the retail and F&B sectors were at its peak, and the company could never shake off the belief that it overpaid on some of the brands/assets it acquired.

Marka isn’t the only listed company to have toyed with the idea of bankruptcy. In September last, many of Drake & Scull International’s shareholders were having similar thoughts after a meeting was called to decide whether the company ought to be dissolved. (The Companies Law requires such a shareholders’ meet when accumulated losses reach half of the issued share capital.)

At that time, a strategic investor — Tabarak Investment — did manage to assure shareholders that a turnaround was still possible. (The company’s share, however, was suspended from trading since November last. And in recent weeks, it has had more pressing problems to confront, such as a Dh5 billion loss and the back-to-back departures of its chairman, CEO and chief financial officer. Not just that, its total liabilities now exceed assets by Dh4 billion plus.)

But are shareholders being too quick on the draw when it comes to filing for bankruptcy? Even if they do go ahead with it, are shareholders likely to get anything for their efforts?

“In most situations, there will not be enough cash left to pay all the amounts owed to unsecured creditors, and the liquidator will pay a proportion of the amount owed,” said Neil Hayward, Managing Director and Co-Head at the consultancy Alvarez & Marsal M. E. “So, if unsecured creditors are owed Dh100, but there is only Dh30 remaining, then they will get a 30 per cent recovery.

“It is very rare that any value remains to be distributed to shareholders. In my 20-year experience, I have not worked on one insolvency where this has been the case.”

As it is, shareholders are at the bottom of the pecking order when it comes to recoveries. Once all assets are sold, clearing the costs related to the bankruptcy proceedings and those holding “secured debt” get the priority. Then come those owed “privileged debt” from the company, such as employees with claims of up to three months and any amounts owed to government entities.

Then follow the unsecured creditors and, only then, the shareholders.

By the looks of it, Marka’s shareholders would rather cut their losses than put in more of their money to try and turn things around. Their patience was certainly wearing thin.

Could things have been managed differently? Local authorities have in the recent past given cash-strapped businesses time to sort things out. Shares of Amlak, the mortgage provider, was suspended for seven years as the company inched its way back from the depths of the Great Recession. Much the same happened at the other mortgage lender Tamweel, which was later absorbed by Dubai Islamic Bank.

Until the last, Marka’s board of directors were hopeful of convincing an investor to come on board with the needed capital. But, according to Vikram Venkataraman, Managing Director at Vianta Advisors, the appetite for such risks remains muted. “Demand for failing enterprises or distressed debt in this region is extremely restricted, perhaps limited to strategic sectors or ex-government owned entities. The reluctance of banks to extend sizeable “haircuts” is another deterrent. As long as entities remain operational, even if loss-making, banks are loath to do this.

“But for any strategic investment in a loss-making entity, protection through sound bankruptcy laws are required — one that has been tested and enables rapid settlements. The speed of execution is critical and the current UAE law remains to be fully tested.”

Probably, Marka and its shareholders will put that to the test.

What happens when shareholders decide to initiate

A liquidator is appointed by the UAE courts to take control of the company and distribute its assets to creditors. “This happens in two ways: the business continues to run and is sold to another party as a going concern, which is best way to maximise the value available,” said Neil Hayward, Managing Director and Co-Head at the law firm of Alvarez & Marsal M. E.

“Or the business closes and the liquidator sells the individual assets — e.g., the land, plant and machinery — of the company. However, the value realised on such an asset sale will usually be lower than in a normal sale because the company is naturally a distressed seller.

“The liquidator asks all creditors to state the amount they are owed by the company and if they have any security. The liquidator assesses each creditor’s claim and determines the amount owed and whether the security is valid.”