The Abu Dhabi government is using its vast wealth to execute its vision for the emirate as outlined in its 2030 plan, the main thrust of which is to diversify the economy away from its reliance on oil. The government is behind all of the major initiatives, in one form or another, and is fostering private sector involvement in all aspects of the projects – financing in particular.
The exact size of the government-owned Abu Dhabi Investment Authority (ADIA) fund, generated by squirreling away petrodollars in more recent years, is not known. Estimates from Standard Chartered put it at about $625bn, while the US-based Peterson Institute for International Economics suggest it is about $850bn.
But as ADIA’s huge wealth expands, Abu Dhabi’s banking industry, much like the rest of the UAE, is booming. Bank lending is robust and banks are registering record profits, fuelled largely by enormous public sector growth in the emirate. There seems little doubt that heavy investment in public sector development infrastructure by public and private corporations is driving the demand for bank financing.
Growing debt market
The debt market in the UAE will also continue to grow, says Samer Alhaj, CEO of Waha Capital, formerly Oasis International Leasing, a firm that has recently transformed itself from an international leasing company into a full service investment house.
“As governments in the region continue to spur economic growth through ambitious development plans, the private sector is playing an increasingly important role in implementing projects of varying scales, in both the manufacturing and services sector. Corporates are looking at expansion opportunities, industries are looking at expansion projects that will require refinancing, and the infrastructure and real estate sectors continue to grow rapidly,” he says. “This situation certainly means that the capital market needs to become more sophisticated, making diverse options available for companies and investors,” he adds.
Of the increase in bank lending, Michael Tomalin, chief executive of the National Bank of Abu Dhabi (NBAD) recently told a local Abu Dhabi daily: “This is a reflection of the UAE story as most of it is corporate borrowing, especially financing growth in Abu Dhabi.”
NBAD, in which the Abu Dhabi Investment Council has a 73% stake, is the UAE’s second largest bank. Its first quarter results for 2008, posted at the end of April, showed substantial growth in its loan portfolio, reaching Dh93bn ($25bn), up 51% on the same period last year. NBAD net profits for the first quarter soared by 45% to Dh875m.
Analysts believe that this impressive lending growth is driven largely by corporate demand rather than by government or consumer demand. Reduced competition from international lenders, which have been hit by the subprime crisis, is also thought to be diverting business to UAE banks. Banks in the region have remained relatively unscathed by the crisis.
For the first quarter of 2008, Abu Dhabi Islamic Bank also reported an impressive 47% increase in profits over the previous year, reaching Dh244.5m. Net income from lending jumped by 31% to Dh481.1m, the bank reported. Although Abu Dhabi Commercial Bank (ADCB) is publicly listed, members of the ruling family, ADIA and prominent UAE nationals hold 39% of the equity.
A week earlier, ADCB announced that it had earned net profit of Dh517m for the first quarter of 2008, up 10% on the previous year. Loans and advances increased by Dh15.7bn to Dh80bn from Dh64.3bn during the corresponding quarter in 2007. The government of Abu Dhabi has a 65% stake in the bank.
Revolving credit
Among the financing deals being undertaken is a Dh1.1bn revolving credit facility signed between Abu Dhabi Ports Company (ADPC), the master developer for the multi-billion dollar Khalifa Port and Industrial Zone, and NBAD. The one-year facility, signed in December, was ADPC’s maiden debt financing transaction. It will enable the company to meet the immediate project development expenses of the first phase of Khalifa Port’s construction, set for completion by the end of 2010.
In February, ADPC also signed a one-year Dh459m revolving credit facility with HSBC. The arrangement is the second bridge facility arranged for the company to help meet the initial construction costs of Khalifa Port.
ADPC is in the process of structuring other long-term project finance facilities and is evaluating different finance options. ADPC’s CEO and managing director, Ahmed Al Calily, says: “We will go with local or foreign banks. We are considering bonds, Islamic sukuks and project financing.”
He says: “We want to involve the private sector in the financing of these projects. It is a strategic decision and is not needed for cash purposes. It is a government decision to nurture local and foreign businesses as financiers.” The scale of the project is so large that many banks can be involved, he adds.
Structuring deals
Mr Al Calily notes that, although banks are becoming more sophisticated in the way that they structure deals, “local banks still have a way to go”. Nonetheless, they are “more comfortable now than five years ago”, he says.
Another notable trend is that most major local banks, and other financial institutions as well, are considering issuing convertible bonds as a way of raising debt competitively. Gulf Cooperation Council convertible bond and sukuk issuance is concentrated in the UAE, and demand in the region reportedly comes from banks, pension funds and large institutional investors.
Abu Dhabi’s First Gulf Bank announced in February its intention to issue up to $2.5bn in convertible notes, which, if it goes ahead, will be one of the largest convertible issuances to have taken place in the region. ADCB also launched a Dh4.8bn convertible bond. Sharia-compliant Amlak Finance, a home loan financier, has announced its intention to issue Dh1.8bn of convertible notes this year. Amlak’s competitor Tamweel has shareholder approval for a second convertible sukuk, a Dh1.1bn issue. And Abu Dhabi National Energy Company, Taqa, is also preparing to issue a Dh4.1bn convertible bond.
The UAE’s National Central Cooling Company, Tabreed, listed a $1.5bn sukuk on the London Stock Exchange on April 30 that was marketed in the UAE, Hong Kong and London.
Strategy adaptation
Abu Dhabi’s 2030 vision is also impacting on the way that some finance companies are positioning themselves. In February, Waha Capital launched its new corporate identity, at which time company executives said that it would be investing Dh20bn during a three-year period in six key sectors: aviation, finance, real estate, infrastructure, maritime and logistics.
Waha Capital’s Mr Alhaj says that Abu Dhabi’s plan gave impetus to changing the firm’s organisation and strategy. Waha Capital’s vision ties rather neatly into the Abu Dhabi vision. “In fact, the very idea of restructuring an existing single-business enterprise into a multi-business corporate has its origin in Abu Dhabi’s vision for economic diversification,” he says.
Waha Capital expects a surge in demand for a wide range of goods and services in the coming years to fuel Abu Dhabi’s new economic development plans. “These are big challenges but we prefer to see them as great opportunities to invest in and develop new businesses,” says Mr Alhaj.
The group’s new structure allows Waha Capital to expand into sectors such as air, land and water transportation, as well as into other areas, such as housing, education and health, where pressure on these services will increase, says Mr Alhaj. “This is why we say that our vision for growth and diversification is closely aligned to that of Abu Dhabi’s.” The future of Waha Capital mirrors that of the financial sector in general. Both are inextricably linked with Abu Dhabi’s vision for a bigger and brighter future.
A SNAPSHOT OF PROJECTS IN THE 2030 ABU DHABI MASTERPLAN
Khalifa Port and Industrial Zone (KPIZ) involves the construction of a container and industrial port covering 100 square kilometres of industrial, logistics, commercial, educational, and residential special economic and free zones.
It includes a world-class steel mill, an auto parts industry and a new aluminium smelter, the largest single-site smelter in the world, which will feed metal to these other industries. With a total estimated cost of $5bn, the Emirates Aluminium smelter is a 50/50 joint venture between the Mubadala Development Company and Dubai Aluminium. Completion is set for 2011.
In early April, the International Petroleum Investment Company (IPIC) also announced the establishment of Chemicals Industrial City at KPIZ. Working with Borealis, a chemical company based in Austria that is majority-owned by IPIC, the city would become the biggest integrated plastics and chemicals complex in the world. It forms part of the country’s drive to build a viable petrochemical industry.
The Abu Dhabi Future Energy Company, owned by Mubadala, launched the Masdar initiative in 2006. An allocation of $22m has been made for the project, envisaged to become the world’s first zero-carbon, zero-waste and car-free city by 2015.
Mubadala has formed a joint venture with The John Buck Company of Chicago, US, to develop real estate projects in Abu Dhabi and the Middle East. Known as Mubadala Buck Properties, the joint venture will be based in Abu Dhabi and will be responsible for the design, construction, financing, leasing and management of its projects. Its first scheme is Al Suwwa Island, which is being developed as a commercial centre for Abu Dhabi. The island will include a stock exchange, along with commercial and residential buildings, a hotel and a hospital managed by the US’s Cleveland Clinic. The island will also be served by the Abu Dhabi light-rail system, which is in the early stages of design.
Mubadala Buck Properties is not the first real estate joint venture formed by Mubadala. Last June, it formed a $300m joint-venture company with Singapore’s CapitaLand to develop residential, retail, sports and leisure buildings around the Zayed Sports City Stadium.
