Emaar Malls plan merger with Emaar Properties a credit negative: Moody's

Dubai [UAE], March 8 : Moody's Investors Service has said the proposed merger of Emaar Properties and its subsidiary Emaar Malls by way of share swap will be credit negative for the latter.
Emaar Malls shareholders excluding Emaar Properties, which owns 84.6 per cent of Emaar Malls, will receive 0.51 Emaar Properties share for one Emaar Malls share, equating to a 7.1 per cent premium to Emaar Malls' closing share price on March 1.
"The transaction will be credit negative for Emaar Malls because it will increase credit linkages between Emaar Malls and Emaar Properties, and because Emaar Malls will no longer be listed following the merger. It will therefore lose access to the equity market to raise capital."
Moody's said the proposed transaction contrasts with its expectation of Emaar Malls developing as a quasi real estate investment trust by virtue of expanding its shareholder base and thereby reducing the influence of its parent.
Although the two entities will continue to operate at arm's length, the lack of minority shareholders increases governance risks. Emaar Malls' financial policies will not change, including dividend payments of 50 to 70 per cent of funds from operations and a maximum gearing (net debt divided by equity plus net debt) of 50 per cent.
The company has a good track record of operating under these policies. "However, we view its decision not to pay dividends in 2020 despite the weak outlook for its parent's development business as positive," said Moody's.
Emaar Malls' issuer and sukuk ratings are unchanged by the proposed merger. Moody's said it believes Emaar Malls has no intention to increase its leverage from current levels or to conduct any transaction aimed at supporting Emaar Properties by way of leveraging Emaar Malls' balance sheet.
A sukuk is a sharia-compliant bond-like instruments used in Islamic finance. Sukuk involves a direct asset ownership interest while bonds are indirect interest-bearing debt obligations.
"We estimate Emaar Malls' adjusted gross debt to EBITDA was 2.5x as of December 31, 2020 and within our guidance for a Baa2 rating."
On the date of the merger, which will take place after certain conditions are satisified (like the transaction's approval by Emaar Malls' sukuk holders), Emaar Properties will assume Emaar Malls' assets and liabilities and Emaar Malls will be dissolved as a legal entity.
Emaar Malls' existing business will be reconstituted into a new wholly-owned subsidiary of Emaar Properties. Emaar Malls Management LLC will become the new obligor of existing Emaar Malls 750 million dollar sukuk.