First Abu Dhabi Bank corporate finance chief champions Middle East

Andy Cairns

Andy Cairns could not have timed his move to the United Arab Emirates any better. After working his way up the debt capital markets (DCM) ranks at bulge-bracket firms in Hong Kong, New York and London, he landed in the Middle East in 2013, as the region was on the verge of internationalising. US and European banks were beefing up local operations, and the impending oil collapse would force governments into the debt markets for the first time to plug budget deficits.

The region’s financial transition has accelerated over the past two years, with 2016 the busiest year on record for loan and DCM activity in the Middle East and north Africa (MENA). In 2017, DCM volumes eclipsed loans for the first time.

A multi-dimensional market

As head of global corporate finance at First Abu Dhabi Bank (FAB) – a role that encompasses capital markets, loans, advisory, and issuer and securities services – Mr Cairns is experiencing MENA’s funding transformation at first hand. The headline volumes are impressive, but he highlights that the vast majority of $2bn-plus bonds in 2017 were issued by governments.

“When you drill down and see that more than 70% of supply came from sovereigns, you realise that MENA capital markets are somewhat one-dimensional,” he says. “But regional issuance is continuing to evolve and I expect governments to be less busy this year with an increase in financial institution group [FIG] and corporate issuance.”

Borrowers looking to replace oil revenues, and pre-finance or refinance before interest rates climb in tandem with the US, was the story of 2016 and 2017. But from 2018, a bigger driver will be corporates’ growing sophistication and realisation of the benefits of diversifying their sources of liquidity. The development of local capital markets has been stymied by the fact many Middle Eastern currencies are pegged to the US dollar; a situation that has discouraged international investors as there is no foreign exchange pick-up. It means corporates must look to the Eurobond market, taking advantage of the pricing curve set by their governments.

The trend has already started. Private sector debuts in 2017 include Emirates REIT’s $400m sukuk, Qatar Re’s $450m sale of Tier 2 capital, ACWA Power’s $814m project bond and a £3bn ($4.19bn) bond from the Abu Dhabi National Oil Company (Adnoc) group. “These new names go some way to explaining why fixed-income issuance exceeded syndicated loan volumes for the first time last year. There is a migration of historical loan borrowers into the fixed-income markets,” says Mr Cairns.

FIG goes private

Before 2016’s wave of sovereign debuts, banks were the Middle East’s biggest bond issuers. They have remained active in recent years but lately many have shunned the syndicated markets. One-third of MENA FIG issuance in 2017 was done privately, a format particularly favoured by Qatari and UAE issuers. One driver is non-MENA investors’ valuation of risk premia in certain parts of the region.

Mr Cairns says 2016 and 2017 saw a marked increase in MENA private placements (PPs), adding: “[They] have proved a discrete means of fundraising for issuers shut out of public markets without validating the elevated spreads being demanded by some investors.” 

Another reason for the upswing in PPs is the cost-effectiveness of niche formats such as Formosa (bonds issued in Taiwan but denominated in a foreign currency). Banks have historically dominated this space and Taiwanese insurers are particularly fond of PPs. Middle Eastern FIGs kept the market ticking along in 2017, and for good reason. “Formosa sold into the Taiwanese investor base can come well inside of conventional pricing for eligible MENA issuers,” says Mr Cairns.

Regional ambitions

FAB’s biggest revenue generator is corporate and investment banking (CIB), which consists of corporate finance, markets and transaction banking, and Mr Cairn’s division is pulling its weight. In Bloomberg’s 2017 league tables, FAB was top bookrunner in Gulf Co-operation Council (GCC) loans, the number two bookrunner in MENA equity and equity-linked deals, and ranked sixth in global sukuk.

But the bank is not resting on its laurels. “We should be doing more transactions in MENA than anyone else as we are the biggest regional bank and this is our backyard,” says Mr Cairns. “That is certainly what we aim for, and is our direction of travel.”

Indeed, in 2017 FAB was global coordinator on Adnoc Distribution’s Dh3.12bn ($851m) initial public offering (IPO) – the first listing on the Abu Dhabi Securities Exchange in six years – and Emaar Development’s Dh4.8bn IPO, the biggest on Dubai’s exchange since 2014. Its advisory bankers helped sovereign wealth fund Mubadala sell a 40% stake in Tabreed to France’s Engie for $775m, while its DCM team helped the bank become MENA’s first green bond issuer. In February 2018, FAB was bookrunner on the Egyptian government’s $4bn triple-tranche deal.

FAB’s fifth place ranking for MENA bonds and sukuk in 2017 belies its strong DCM credentials, and is explained in part by sovereigns typically mandating a mix of domestically active banks and bulge brackets. However, FAB is expanding its operational footprint, having recently received an investment banking licence from Saudi Arabia’s Capital Market Authority (CMA). “We will start operations in Saudi Arabia during 2018. It’s the GCC’s biggest economy and being there is a logical extension of what we are already doing,” says Mr Cairns.

Capturing the value chain

The CMA licence comes one year after FAB, MENA’s biggest bank by assets, was formed by the merger of National Bank of Abu Dhabi and First Gulf Bank. Their combination proved an opportune time to revisit the CIB’s structure, and activities that were in different areas at the legacy institutions were brought together under FAB’s global corporate finance umbrella. “It gives us better alignment across the entirety of our lending proposition, which is now annexed very closely with our capital markets and advisory businesses,” says Mr Cairns. “It means we are better able to solve clients’ needs and capture their evolution from borrower to bond issuer to IPO candidate.”

Testament to this is FAB’s work for Emaar and Adnoc; it helped both borrowers access the loan and bond markets before leading their IPOs late in 2017. This desire to work deals through the entire value chain embodies FAB’s ambition to be known not only for its strong balance sheet (it has an enviable AA- credit rating and 17.8% capital adequacy ratio) but also its structuring capabilities and ability to generate ideas.

“International banks have historically been thought leaders in MENA, and the regional and local banks have been followers. FAB’s focus is very much on being a leader: marrying intellectual capital with our financial strength and scale as the region’s largest bank,” says Mr Cairns. 

Connecting liquidity

This goal is consistent with FAB’s corporate finance value proposition: to be regionally dominant, and through that to be internationally relevant. Mr Cairns is focused on FAB being the bank of choice for international clients wanting to tap MENA investors. To achieve this, he is committed not only to deepening its product offering, but also repositioning the international perception of – and championing – the region to foreign issuers.

“There is a significant pool of liquidity in this region, much of which has historically been recycled indigenously,” he says. “MENA investors increasingly want to achieve portfolio diversification and put more money to work outside of the region, and FAB is the ideal conduit for this.”

To date, this has been impeded by the fact international issuers tend to bypass the Middle East when marketing their deals. “Optimally, issuers would roadshow here, but even if they aren’t willing to do so, if an international client appoints FAB, our single-minded focus is to deliver this regional liquidity to them,” says Mr Cairns. For example, the bank is not going to be distracted by European or US accounts since other bookrunners are better placed in these markets.  

Getting more foreign issuers to visit the Middle East would mark a new step in its internationalisation. But this should not come at the expense of local investors’ important participation in regional deals. The multi-billion-dollar sovereign bonds seen over the past two years would have been impossible without significant offshore money, but Middle Eastern buyers also played a key role.

“They apply lesser risk premia, are typically buy-and-hold and demonstrate greater price elasticity,” says Mr Cairns. “Also their involvement gives comfort to offshore investors as they know there will be a consistent secondary market bid from the local accounts.”