A celebration of the top deals in the Middle East over the past year.

Bonds: Corporate

Winner: DP World's $3.3bn-equivalent multi-tranche bond

Joint bookrunners: Barclays, Citigroup, HSBC, Emirates NBD, First Abu Dhabi Bank, JPMorgan, Société Générale, Standard Chartered Bank

In a jumbo $3.3bn-equivalent deal, port operator DP World issued its first ever euro- and sterling-denominated bonds. Generously oversubscribed, the offer included a US dollar sukuk and a 30-year tranche, and was the first triple-currency transaction out of the Middle East since the financial crisis. DP World is one of the largest port operators in the world, with container and non-container terminals across six continents. It is effectively 80% owned by the Dubai state and is listed on Nasdaq Dubai.

The transaction began with an announcement of the intention to tender the company’s $650m JAFZ sukuk, alongside the issuance of a new US dollar 10-year sukuk and 30-year notes. Though emerging market issuers typically stick to US dollars as the most cost-effective funding option, DP World said it would discuss the possibility of issuing in euro and sterling with investors.

Meetings were then held in London, Germany, Switzerland, Amsterdam and Paris. With $413m of the existing issue having been tendered (with a 64% participation rate), order books were opened for the dollar sukuk and 30-year bond, as well as euro and sterling bonds of intermediate tenors.

Investor interest was strong and the books peaked at $7.7bn equivalent, allowing the issuer to price a quadruple-tranche transaction with strong international distribution.

The sukuk was sized at $1bn with a profit rate of 4.85%, accompanied by a further $1bn in 30-year notes yielding 5.7%. An eight-year €750m bond was priced to yield 2.5%, alongside £350m ($453.1m) of 12-year senior unsecured notes yielding 4.33%. All the tranches were able to tighten from initial price thoughts, by up to 25 basis points in the case of the sukuk.

Commentators observed that the deal succeeded despite fears of a trade war between the US and China, as well as an uncertain economic backdrop in Dubai, where residential property prices continued to slide.

Bonds: SSA

Winner: Qatar’s $12bn senior unsecured bond

Joint bookrunners and lead managers: Al Khaliji, Barclays, Crédit Agricole CIB, Credit Suisse, Deutsche Bank, Mizuho Securities, QNB Capital, Standard Chartered Bank

Despite Qatar’s local difficulties, this was the largest bond deal from an emerging market sovereign in 2018 and to say it was massively oversubscribed is, for once, no exaggeration. It succeeded in spite of what many saw as a spoiler issue from Saudi Arabia only days earlier.

With a travel and trade embargo imposed by its neighbours, Qatar has been relying on its not-insubstantial reserves to sustain its economy. The sovereign had not visited the bond markets since 2016 – before the start of the boycott – and, with the oil price rising in early 2018, was under no particular pressure to do so.

Nonetheless, it announced a mandate for a five-, 10- and 30-year US dollar transaction early in April. It did this in spite of an unexpected $11bn intraday deal from estranged neighbour Saudi Arabia a couple of days earlier. This threatened to take liquidity out of the market, thereby pushing up Qatar’s borrowing costs or reducing the amount it could issue. Saudi Arabia denied that its decision to issue was politically motivated.

Initial price thoughts were Treasuries plus 170 basis point (bps) for the five-year, plus 200bps for the 10-year and plus 230bps for the 30-year. Bankers reported that bookbuilding momentum was strong from the start and combined global books closed above $52.6bn with a skew towards the longest dated tranche.

The deal closed with a $3bn five-year tranche priced at Treasuries plus 135bps and yielding 4.03%, $3bn 10-year at Treasuries plus 170bps yielding 4.54% and $6bn 30-year at Treasuries plus 205bps yielding 5.1%. The combined total of $12bn may have been chosen with the Saudis in mind. The strong and internationally diversified investor base for the deal made it instrumental in allowing other Qatari issuers to access the market, bankers said.

Equities

Winner: Qamco’s QR2.73bn initial public offering

Sole listing and offering manager: QNB Capital

Funding banks: Doha Bank, QNB Capital, Qatar International Islamic Bank, Ahli Bank 

In the first Qatari privatisation since 2014, shares in Qatar Aluminium Manufacturing Company (Qamco) were offered to the public amid a challenging market environment. It targeted retail investors who snapped up the stock and saw it perform strongly in the immediate aftermarket.

Qamco was formed to own 50% of Qatalum, a joint venture between state-owned Qatar Petroleum and Norsk Hydro. Qatar Petroleum, the sole founding shareholder, retains 51% of Qamco following its listing on the Qatar Exchange.

It was the largest initial public offering (IPO) from any of the Gulf Co-operation Council (GCC) states in 2018. However, it faced considerable headwinds. 

The prevailing rally in the aluminium price was expected to end soon – indeed, the price fell 19% between the IPO’s announcement and the listing date. Meanwhile, regional tensions were high, following the blockade on Qatar imposed by its neighbours. US sanctions on Oleg Deripaska and his aluminium interests – including Rusal, the largest aluminium company outside China – were severely affecting aluminium supply. And US-imposed tariffs on aluminium imports were hitting industry profitability.

The selling shareholder went ahead nonetheless, believing in the fundamental value of Qamco and in its long-term outlook. A heavy marketing campaign was carried out across all channels, including social media, and it was the first Qatari IPO to have an online prospectus. An SMS campaign reached 1.5 million potential investors and bankers described the total number of applicants as a “significant part of the Qatari population”.

Investors, it turned out, saw the pricing as competitive and sufficiently attractive despite the challenging outlook for commodities. More than 2.5 times total retail share coverage was achieved, and 90% of the allocation went to retail investors. The share price rose 50% on the first day of trading, though after three months, gains had settled down to a more modest 15% or so.

FIG financing

Winner: Dubai Islamic Bank’s $750m AT1 issuance

Joint bookrunners and lead managers: Dubai Islamic Bank, Emirates NBD Capital, First Abu Dhabi Bank, HSBC, JPMorgan, KFH Capital, Sharjah Islamic Bank, Standard Chartered

Dubai Islamic Bank (DIB) came to market with the first ever fully Basel III-compliant additional Tier 1 capital (AT1) bond from Dubai. The result was a muscular oversubscription, the highest for a Middle Eastern hybrid in the past two years.

DIB is the second largest Islamic bank in the world and the largest Islamic bank in the United Arab Emirates by total assets. Early in January it announced a series of fixed-income investor meetings in Hong Kong, Singapore and London. Following the meetings, with strong interest evident in a potential AT1 sukuk, DIB issued initial price thoughts for a deal at high 6% area.

As the order book grew, the issuer released price guidance of 6.5% area, followed by final price guidance of 6.25%. With the final order book standing at $3.7bn, a $750m deal was printed. The structure was that of a mudaraba, with a perpetual non-call six-years tenor, a dividend stopper and full non-viability loss absorption.

Fund managers took 34% of the deal, followed by private banks (32%) and banks (31%). Geographically, the bulk of the allocation went to the Middle East and north Africa, at 62%, followed by Europe and the UK (19%), Asia (18%) and offshore US (1%).

The day before the deal was priced the UK parliament voted down the government’s Brexit deal, which unsettled markets. Bankers noted that, in spite of this uncertainty, DIB was still able to announce a transaction and garner strong investor interest. This, bankers said, reflected confidence in the credit.

Green finance

Winner: DP World’s $2bn green revolving credit facility

Green loan coordinator: Standard Chartered

DP World successfully amended and extended its $2bn conventional and murabaha revolving credit facilities, becoming the first company in the Middle East and in the global ports sector to link environmental performance to its banking credit facilities.

Dubai-based port operator DP World describes itself as a leading enabler of global trade and an integral part of the supply chain. It operates multiple but related businesses from marine and inland terminals, maritime services, logistics and ancillary services to technology-driven trade solutions.

Container handling is DP World’s core business, generating more than 50% of its revenues, and in 2018 it handled some 71 million 20-foot equivalent containers. By 2020 it expects that figure to rise to 100 million.

DP World’s revolving credit facility has been extended by two years to a five-year tenor. The credit margin of the facility is now linked to the company’s carbon emissions intensity, with the lending group incentivising DP World to reduce its greenhouse gas emissions.

While this structure is increasingly seen in Europe, DP World is the first Middle Eastern borrower to use it, and this was the first syndicated Islamic facility with incentives to improve environmental performance in this way. It was the first facility anywhere in the world to use carbon emissions over throughput as a factor in determining margin, bankers said.

Standard Chartered worked closely with its client to shape the appropriate green key performance indicators and thresholds, so they would meet its needs and be accepted by the loan market. In total, 19 banks participated, many of whom had never before been involved in green facilities.

High-yield and leveraged finance

Winner: Kuwait Food Company’s $1.3bn syndicated loan facility

Mandated lead arranger and bookrunner: First Abu Dhabi Bank

Kuwait Food Company and its new owners signed a dual-tranche $1.3bn syndicated term loan facility, including an Islamic tranche. Kuwait Food Company is the largest integrated food company in the Middle East, operating food and beverage outlets and manufacturing food products. Otherwise known as Americana, it has more than 1200 outlets embracing 23 restaurant chains in 13 countries. These include some of the best-known international brands, including KFC, Pizza Hut and TGI Friday’s, as well as a number of home-grown brands.

In 2016, after one of the region’s longest running acquisition sagas, a majority stake was bought by Adeptio, an investment group led by prominent Dubai businessman Mohamed Alabbar. The outstanding minority shares were mopped up the following year.

The new facility had two immediate purposes, according to bankers. One was to help the company to optimise its capital structure, while the other was to allow upstreaming of an additional dividend to the holding company, partly to pay down debt at holding company level.

It is structured in two tranches. The operating company facility is a $673m conventional seven-year term loan with Adeptio as borrower. The second, bidding company facility is a $627m five-year murabaha for Kuwait Food Co. The operating company facility is repayable via instalments of 5% in 2023, 37.1% in 2024 and the balance in a bullet at maturity in 2025. The bidding company loan will be repaid with the first 77% in annual instalments from May 2019, with a 23% bullet at maturity in 2023.

The facilities were secured by a pledge of shares, an account pledge, an assignment of dividend and credit card receivables, a commercial premises pledge and an assignment of intercompany loans. They were also backed by parent company guarantees.

Infrastructure and project finance

Winner: Al Dur Power & Water's $1.3bn refinancing

Financial adviser: Standard Chartered

Participating banks: Ahli United Bank, Al Rajhi, Apicorp, Arab Bank, Arab Banking Corporation, Arab National Bank, Gulf International Bank, Kuwait Finance House, MUFG, Banque Saudi Fransi, BNP Paribas, Crédit Agricole CIB, Export Development Canada, KFW Ipex, Mashreq Bank, National Commercial Bank, National Bank of Kuwait, Riyad Bank, Société Générale, Standard Chartered Bank

This was a successful refinancing of a highly strategic asset for Bahrain in challenging conditions, including a downgrade of the sovereign’s credit rating.

Al Dur Water & Power is a flagship independent water and power project, commissioned in 2012 and accounting for about one-third of the country’s power and water production. It has a long-term off-take agreement with state organs, expiring in 2036.

The project achieved financial close in 2009, with a total cost of $2.2bn, financed by some $1.6bn of debt, domestic and international, conventional and Islamic, and with a substantial balloon amount payable at contractual maturity. In 2018, some $1.18bn was required to repay existing financing, terminate hedges, fund the debt service reserve account and related refinancing costs.

With Standard Chartered as financial adviser, Al Dur explored different refinancing plans, including the possible combination of debt capital market issuance and a commercial bank facility. Given the challenging emerging market environment, however, the company opted for a bank financing.

The total refinancing required was $1.31bn, but the company contributed $12.5m from existing cash, leaving total debt at $1.3bn. The financing had a dual-tranche structure, with the second tranche effectively displacing the capital markets issuance. Facilities with a tenor of approximately 9.5 years had annuity-type repayment profiles. Those with a notional tenor of approximately 12.5 years had a largely back-ended repayment profile, benefiting from a cash-sweep feature to ensure a weighted average life to nine years.

More than 20 regional and international lenders participated via conventional and Islamic facilities. Including lenders and hedge providers both old and new, more than 30 institutions were involved in the refinancing. With swaps having been initially entered in 2009 in a much higher interest rate environment, Al Dur had material negative mark-to-market exposures, and Standard Chartered acted as hedge coordinator to ensure a smooth execution process.

Islamic finance

Winner: VIP Investments’ $109m Islamic acquisition facility

Sole coordinator and bookrunner: Mashreq Bank

Mandated lead arranger: National Bank of Fujairah

Lead arrangers: Noor Bank, Warba Bank, National Bank of Kuwait

A Chinese-led consortium raised up to $109m equivalent to part-fund the leveraged buyout of a Middle Eastern asset, financed entirely by regional banks.  One unusual feature was a capital expenditure (capex) to earnings before interest, taxes, depreciation and amortisation (Ebitda) covenant.

The acquisition target was Byrne Group, the Gulf Co-operation Council’s leading equipment leasing company, active in the construction, oil and gas and infrastructure sectors, among others. It has a presence across the region, in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The VIP Investments consortium, which is paying some $250m for the business, brings together three investors. One is Itqan Investments, the vehicle of Saudi businessman Hamad al Sulaiman. The other two are Hong Kong-listed entities – Tamar VPower Energy Fund, which targets energy opportunities in China’s Belt and Road Initiative markets, and Citic Pacific, part of China’s largest conglomerate.

Mashreq concluded a syndication of regional banks to support the acquisition with a $106m Islamic facility in two tranches – US dollars and Emirati dirham. A commodity murabaha, it was structured as a holding company facility with no recourse to acquirers and no tangible collateral, and so predicated on upstreaming of distributions from the target business.

Bankers said the timeframe after receipt of commitments was challenging, given the number of parties involved, as well as the Chinese acquirers having to acquaint themselves with sharia principles. The acquisition required commitments to be delivered before finalisation of the share purchase agreement.

Given the reliance on upstreaming of cash, certain atypical concepts were introduced to the facility, including the capex-to-Ebitda covenant to ensure sufficient business liquidity in the target business.

In another complication, the Qatar embargo was imposed during the execution process, which required the carving out of the Byrne operations in Qatar. Part of the facilities have been kept aside to acquire the Qatari business in the event the embargo is lifted.

Loans

Winner: $800m revolving credit facility for Dubai Aerospace Enterprises

Overall transaction coordinator and bookrunner: Al Ahli Bank of Kuwait

Joint bookrunners: Al Ahli Bank of Kuwait, First Abu Dhabi Bank (facility agent), Noor Bank (Islamic agent)

In the Middle East's first revolver of its kind, new lenders unfamiliar with the credit were allowed to accede at their own pace, allowing Dubai Aerospace Enterprises (DAE) to achieve an oversubscribed $800m facility.

DAE, a global aerospace corporation headquartered in Dubai, provides finance and leasing solutions to the airline industry. With a 2018 portfolio of 365 aircraft, it had total balance sheet assets of $15bn and borrowings of $10bn.

DAE wanted a flexible arrangement whereby it could pre-finance assets, making pre-delivery payments (PDP) ahead of permanent asset-based financing. It wanted to broaden its banking platform with new banks, and sought acceptable pricing, both Islamic and conventional participation, and covenant-thin financing.

This was the first time a PDP revolver was syndicated in the region and, unusually for a revolving credit facility, the leads used an accordion feature to reach their target. Al Ahli Bank of Kuwait (ABK) formed a club with First Abu Dhabi Bank and Noor Bank to document a $480m revolver.

They noted that, while Asian banks had appetite for government-related exposure in the region, their turnaround times were generally long, so they took a two-tier approach: they managed the accession of new Asian lenders in their own time, allowing them to familiarise themselves with DAE without execution time pressure.

The result was that within four months the facility was upsized and successfully closed at $800m, while being oversubscribed. A specific technical feature (a built-in minimum drawn utilisation amount) was added to the Islamic murabaha structure, allowing the Islamic tranche to remain in force throughout the lifetime of the facility.

M&A

Winner: Adnoc Drilling strategic partnership with Baker Hughes

Sole financial adviser to Adnoc: Moelis & Co 

Adviser to Baker Hughes: Citi

In its first-ever corporate merger and acquisition transaction, Abu Dhabi National Oil Company (Adnoc) sold a 5% stake in Adnoc Drilling to US oilfield services company Baker Hughes. The two parties signed a strategic partnership agreement aimed at turning Adnoc Drilling into a fully integrated well construction provider.

The deal was part of Adnoc’s 2030 transformation programme as it seeks to develop its assets and expand its partnerships. Moelis has been the exclusive independent financial adviser on the programme.

Set up in 1972, Adnoc Drilling has been the sole rig provider in Abu Dhabi and the largest drilling company in the Middle East, with a substantial fleet of rigs. However, it only provides drilling, leaving the sizeable and critical services portion to international oilfield services providers. Adnoc wanted it to be able to construct a well from start to finish.

Moelis mapped out the strategic options available, such as organic growth, stake sale, joint venture, commercial partnership and acquisitions, testing each against Adnoc’s transformation criteria. These included monetisation, partnership and efficiency.

It was decided to establish a partnership by selling a minority stake in the drilling business, recognising that a strategic partner would bring significantly more value than a financial sponsor. Ideally, it would be a top-tier oilfield services company with a global network and experience in Abu Dhabi, which limited the field somewhat.

In October 2018, Adnoc signed an agreement with Baker Hughes, which acquired a 5% stake. This valued Adnoc Drilling at about $1bn upfront, plus significant future earn-out payments. Baker Hughes will be the sole provider of certain proprietary leading-edge and differentiated equipment and technologies, supporting Adnoc Drilling’s growth.

In January 2019, Adnoc Drilling, in its new partnership with Baker Hughes, was able to drill its first fully integrated well, ahead of schedule.

Restructuring

Winner: Dana Gas restructuring

Adviser to Dana Gas: Houlihan Lokey

Dana Gas resolved a litigious dispute which had the entire Islamic finance industry holding its breath, and restructured $700m-worth of sukuk. Bondholders could cash out or exchange for a new sukuk with a lower profit rate, and most of them exchanged.

Sharjah-based exploration and production company Dana Gas had cash collections issues back in 2016 and 2017, with delays in payments from Egypt and the Kurdish region of Iraq. It said it would restructure two sukuk, each worth $350m. An ‘ordinary’ sukuk paid 9% and the other, convertible into Dana Gas shares, paid 7%. Both matured at the end of October 2017.

While the company said it favoured a consensual process, the bondholders (including BlackRock and Goldman Sachs) claimed the company was in default and issued a dissolution notice. Dana Gas then said legal diligence revealed that the two mudaraba sukuk were not compliant with Islamic law.

While Islamic scholars sometimes change their opinions on a structure’s permissibility, borrowers do not generally use this as a reason not to pay their debts. Much legal to-ing and fro-ing followed in both the UK and United Arab Emirates courts. An exchange offer was made and then withdrawn, while a counter-offer was made and rejected.

Eventually, through direct negotiation with the bondholders’ representatives, Houlihan Lokey brokered a consensual deal that helped Dana Gas save more than $85m over the next three years in profit payments and discount achieved on principal buybacks.

Option A for bondholders was to accept a tender offer at 88% of the sukuk value plus a 2.5% early participation fee, capped at 25% participation. Option B was a 20% upfront repayment on the face value of the existing sukuk, with the rest exchanged into a new three-year sukuk paying 4%. More than 90% of sukuk holders opted to exchange for the new instrument.

 

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