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| Aabar Investments PJS unsecured exchangeable bond | |
| Size | €1.25 billion |
| Date | May 24 2011 |
| Lead managers | Bank of America Merrill Lynch, Deutsche Bank and Morgan Stanley |
| Coupon | 4% |
| Tenor | Five years |
| return to the Middle East & Africa Deals of the Year index | |
Another example of Gulf firms tapping alternative financing at a time of tighter global liquidity can be seen in the €1.25 billion exchangeable bond from Aabar Investments PJS in May.
The government of Abu Dhabi owns Aabar indirectly through investment vehicle International Petroleum Investment Company (Ipic). The five-year notes were issued over 21% of Aabar’s 9% stake in German car and truck manufacturer Daimler.
“Sovereign wealth funds haven’t traditionally used the equity-linked market,” says Bertrand Valet, part of the sovereign wealth funds group covering Aabar at Bank of America Merrill Lynch – one of the bookrunners.
“Aabar has financed stakes through the private market [often using] non-recourse loans backed by derivatives. Our recommendation was to replicate this by using the capital markets to find efficiency in the cost of funding, [which was] not accessible in the private market as much as before.
“Ipic supported [the transaction] on the basis that, one, it was an efficient way to refinance the position in Daimler, and two, it affirms the independence of Aabar in [its] ability to finance investments.”
Ipic has a policy of ensuring its subsidiaries are self-funding, without guarantees from Ipic (each subsidiary has its own finance team). Examples are funding done by other 100%-owned Ipic subsidiaries: Nova Chemicals of Canada, via the leveraged finance market; and Spanish energy firm Cepsa, via the Spanish banking market.
Aabar’s exchangeable bond does not enjoy a guarantee from Ipic, and this was the largest ever exchangeable bond for an unrated issuer in Europe, the Middle East and Africa. Yet the bonds carry a semi-annual coupon of 4% a year, with an initial exchange premium of 30% of the volume-weighted average pricing between the deal’s launch and its pricing on the Frankfurt trading system Xetra.
“Market conditions for equity-linked transactions were supportive and Aabar got a good price for its credit,” says Yacine Amor, BAML’s head of equity-linked transactions in London.
Aabar’s long-term commitment to Daimler is maintained via a call-spread overlay. The investment in Daimler fits into Abu Dhabi’s domestic development: there are plans, for example, for petrochemical plants in Abu Dhabi to provide plastic components for Daimler cars.
The bond’s performance in the secondary market has suffered from the impact of global equity-market volatility on Daimler’s equity prices. Nevertheless, the deal creates a new precedent for sovereign wealth funds to tap equity-linked investors. Singapore sovereign wealth fund Temasek has since sold an exchangeable bond over Standard Chartered shares for an equivalent of $600 million.
