Sukuk: Dubai Ports raises $3.5 billion

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Peter Koh
Published on:

First-of-a-kind deal exploits strong interest in regional IPOs.

The Dubai Ports, Customs & Free Zone Corporation (PCFC), which is already making waves with its bid for P&O’s ports business via its subsidiary Dubai Ports World, made headlines again this January by launching a $3.5 billion, first-of-its-kind convertible sukuk.

The deal, managed by Barclays Capital and Dubai Islamic Bank, is a pre-IPO convertible that allows for a partial redemption of up to 30% in the form of shares in PCFC entities as and when they go for an IPO or secondary public offering within the next three years.

Dubai ports Allocation
by region
Source: Barclays Capital
The deal is the first Shariah-compliant convertible instrument ever issued and also one of the largest convertibles of all time.

A sukuk is a form of asset-backed bond. In this case, the collateral backing the bond includes land and the cranes of the Dubai Port, which have been put into a musharakah, an asset vehicle under a long lease. Also included is a pledge of 49% of the shares of Thunder FZE, the company that would be used to acquire P&O should the deal succeed.

Intelligent finance

“The issuer wanted to find a way of raising finance intelligently to meet its needs and take advantage of market conditions,” says Stephen Jones, head of the European financing solutions group at Barclays Capital. “We started with a blank sheet of paper and devised the instrument from scratch. The solution we came up with is a structure that has never been done before.”

The sukuk offers a yield of 7.125% per annum, equivalent to 200 basis points over two-year dollar swaps, if an IPO or secondary public offering takes place during the next two years. If there is no IPO or secondary offering, the deal offers a maturity yield of 10.125% per annum on bonds outstanding at maturity, equivalent to 300bp over dollar swaps.

Oversubscribed

The deal attracted such strong demand that it was three times oversubscribed even after having been increased in size from $2.8 billion.

Over 150 investors participated in the issue, with 86% of the demand coming from regional investors and the rest from Europe, Asia and the rest of the world. Islamic and conventional banks took 74% of the deal, with the rest going to private investors and institutional fund managers.

Although the deal priced 50bp within the tight end of the 250bp to 350bp price range, investors still found it good value.

“The deal is the biggest sukuk ever and one of the first convertibles in the region,” says Rabih Sultani, head of debt and structured products at Shuaa Capital, a regional fund manager, which bought into the deal. “The company is one of the most attractive in the Middle East and although it is unrated its credit strength is much better than what the international market is prepared to recognize. This gives us an opportunity to gain on the difference in spread between what we expect and what the international market expects. As a bond fund manager it is also extremely attractive to get exposure to the booming IPO market.”

PCFC might well have achieved cheaper funding had it gone for a smaller regional deal but the company was willing to pay more to attract international shareholders.

The company is raising cash to fund its business plans, including the P&O bid, and is part of a larger financing package that included a $6.5 billion senior debt facility.