Euromoney deals of the year: Middle East and Africa

Euromoney, February 2013

Middle East:

Abu Dhabi Islamic Bank $1 billion perpetual non-call six-year hybrid tier-one sukuk. Bookrunners: ADIB, HSBC, Morgan Stanley, National Bank of Abu Dhabi, Standard Chartered.

IPIC $2.9 billion-equivalent dual currency, three tranche offering. Bookrunners: BNP Paribas, JP Morgan Chase, National Bank of Abu Dhabi, Natixis, RBS, Unicredit.

Africa:

Jinchuan ZAR9.112 billion acquisition of Metorex. Advisors: Goldman Sachs (Jinchuan), Standard Bank (Metorex).

Kingdom of Morocco $1 billion 10-year and $500 million 30-year debut Regulation S/Rule 144a bond. Bookrunners: Barclays Capital, BNP Paribas, Citi, Natixis.

With little happening in equity issuance, the most important deals in the Middle East in 2012 were in debt – and in particular, sukuk, This was the year when Islamic capital market issuance really found its voice, from Qatar’s international record US$4 billion sukuk to a Turkish sovereign debut, Axiata’s dim sum sukuk and important domestic deals in Saudi Arabia and Malaysia. 2012 saw a record $144 billion of issuance, according to IFIS, part of the Euromoney group.

You can read more on some of these deals in our Islamic finance awards, but the trend warranted recognition in this section too, and we selected Abu Dhabi Islamic Bank’s US$1 billion tier one perpetual, launched in November.

This deal logged a number of firsts. Most significantly, it was the first ever Shariah-compliant Tier 1 issue – in fact, the first ever Tier 1 instrument issued by a Middle Eastern Bank, whether in sukuk or conventional form. Being the first Basel 3-compliant issue from the region, it has become a benchmark and ought to lead to many similar deals in future.

“This is a market-changing transaction for the UAE and the region,” says Tirad Mahmoud, ADIB’s CEO. “It marks a key milestone not only for ADIB but for the global Islamic banking industry. For the first time, Islamic banks are able to raise alternative tier one capital according to the Basel standards to boost growth.”

It’s the knock-on effects of the deal, as a benchmark and an illustration of appetite for hybrids, that particularly appeals. “This is part of the evolution of the sukuk sector,” says Mohammed Dawood, global head of sukuk financing at HSBC, one of the bookrunners. “Historically, this market has been characterized by being a vanilla, five-to-seven year market, and typically senior transactions. But over the last year we’ve seen signs the market is moving with the times, adapting and showing innovation. That’s very much represented by this transaction.”

In some respects it is strange that we have not seen Islamic perpetuals before. “A hybrid equity instrument sits very well within the overall principles of Islamic finance and Shariah law,” says Dawood. “The closer you move towards equity, the less structuring challenges there are.” On the roadshow – in the Middle East, Asia and Europe – no questions came up around structure or approval, which was particularly helpful when explaining to conventional investors. “People understood it. Everything clicked and this should be a natural asset class for Islamic finance.” Mahmoud agrees. “The drivers of the deal’s appeal are simple to understand. The instrument was mutually beneficial, transparent, and simple.”

Having gone out with 7% guidance, the leads were swiftly swamped; the order book eventually hit $15 billion, the highest ever level of oversubscription in a global sukuk. Tightening steadily, the deal eventually came at a coupon of 6.375%, low for international dollar tier one issuance in any market. Considering this was the first publicly offered bank capital instrument from the UAE since February 2008, the appetite was extraordinary, and remains so; in the following month the note traded up 5.2% in the secondary market as others sought to gain exposure.

There ought to be more deals like this, as other Islamic banks grow and seek to diversify their sources of funding. Dawood notes “a marked contrast” in the response from institutions to this type of instrument. “We were marketing hybrid instruments prior to ADIB, and clients were dismissive: they were seen as expensive. Post-issuance there has been a complete sea change.”

The same month brought another impressive debt deal from the Gulf, this time from International Petroleum Investment Corporation (IPIC), Abu Dhabi’s state-backed investment group for the energy sector worldwide. This was a big, multi-currency offering, raising $2.9 billion equivalent in three tranches: a $750 million three-year, Eu800 million 5.5 year and a Eu850 million 10.5-year tranche.

It had been a while since the markets had seen something like this. The dollar tranche was the first three-year benchmark bond from a Middle East non-bank, while the euro tranches were the first from MENA into that market since March 2011 – also by IPIC. It was also the largest conventional Regulation S deal from emerging markets in 2012 to that date, with the lowest ever coupon (1.75% on the three-year), and the largest MENA corporation transaction of the year.

“We had to go back to investors to price very aggressively, in large benchmark size, and hit a target of $2.9 billion. That is what was asked of us,” says Nick Darrant, head of CEEMEA syndicate at BNP Paribas, one of the joint lead managers on the deal. As a Regulation S trade without 144a, the deal could not be sold into US onshore accounts. “We were firmly targeting European domiciled investors; this trade was going to live or die by our success in appealing to that investor base.”

Perhaps the most striking thing about this deal was who bought it. Where previously, most of the buying was from emerging market dedicated funds, this time the leads noticed a difference. “The order book was made up predominantly of true investment grade European buyers, approaching the credit in the same way they would buy French and German names,” says Darrant. “This was a transformational trade from that perspective. IPIC now gets mentioned in the same breath as some big European continental peers.” It is, Darrant says, “some of the most attractive AA-rated paper on the planet.”

That’s partly to do with who owns it, but also the strength of the credit itself and its portfolio of oil and gas interests. This elevation of a frontier markets credit, in a nation that doesn’t yet even appear on the MSCI Emerging Markets Index, to the stature of a European multilateral, is what demands recognition in our awards.

Moving to North Africa, debt was again the most interesting area of the capital markets, and nowhere more so than in the Kingdom of Morocco’s extraordinary US$1.5 billion 10 and 30-year dollar debut in December.

This presented investors with something unusual. “The key challenge here was not one facing many sovereigns like market access or banking problems,” says Charlie Berman, head of public sector EMEA at Barclays, a bookrunner on the deal. “The challenges instead were about a very rare type of issuer: an investment grade debut in the dollar market. There really aren’t many of those left.”

Morocco was not a total novice – it has issued in euros several times – but still “most investors were looking at the name for the first time,” says Darrant at BNP, also a bookrunner on this deal. All bookrunners found that the freshness and lack of familiarity of the credit was not a problem – quite the reverse. “Investors are calling out for diversification, for new credits,,” says Darrant. “North African risk is a fairly untapped area for the US market.”

In that respect, Morocco is helped by being nothing like the rest of North Africa: stable, a kingdom and developing democracy, and quite separate from any nation touched by the Arab Spring. Investors are savvy enough to see the difference, and in any case look globally for their comparables these days. “The compartmentalization of issuers into a Middle Eastern name – the world doesn’t like that anymore,” says Berman. “Investors are global. Names could be from anywhere, and the question will always be: is this asset cheap, rich or fair value?” Bookrunners report other BBB names (Morocco is BBB-) like Turkey, Lithuania and Croatia being used as comparables.

After a long nine-day marketing campaign in the UAE, US and London, the response was extraordinary. Morocco went out looking for a 10-year bond, but quickly found longer-term investors, particularly insurers. “30 years was not something we had pitched to the investors,” says Berman. “As often happens, there is a reverse inquiry from a subset of investors saying: we like 10 year but we’d love 30. In this rate environment people are looking for duration and extra yield.”

So it was that a North African issuer, a notch above high yield, brought a dollar debut in 30-year tenor. “I have racked my brains and I can’t think of another issuer printing 30 years straight out of the gate,” says Darrant.

And it flew out the door. The final combined order book was $7.9 billion from 475 accounts. Pricing on the 10-year tightened from 300 to 275 basis points over treasuries; most remarkably, the 30-year came at 290 – lower than the initial guidance for the 10, and extremely close to it in pricing, all at a time when its 10-year euro paper was about 320 over.  “It’s hard to see how the deal could have gone better,” says Berman.

Morocco itself was delighted, with His Excellency Nizar Baraka, Minister of Economy and Finances, describing it to Euromoney as “a great success”. He considers it “an outcome of both the strong credit story and the optimal execution timing. The Kingdom of Morocco enjoys a resilient credit story, having a political and social stability supported by a new Constitution that strengthens democratic processes and governance of the country, a resilient economy [average annual GDP growth of 4.34% between 2007-11 and 5% in 2011], and a prudent fiscal and debt management strategy with a sound banking sector with high capital adequacy ratios.” The roadshow, he says, “positioned the kingdom as a key MENA sovereign, offering political and social stability, scarcity value and quality, with investment grade ratings.”

Baraka was more closely engaged in the deal than is often the case with finance ministers in sovereign issues – many leave it to a debt management office – and was involved in the timing of the deal, making a priority of announcing before the US Thanksgiving holiday. “We were also expecting some investor concerns related to the Arab spring and the socio-political environment in the MENA region,” he adds. “However, we were pleasantly surprised by the strong investor knowledge of the specific situation of Morocco. The Kingdom did not actually experience a revolution, but rather an evolution of the political and economic reform processes” since the accession of King Mohammed VI 13 years ago. Morocco adopted a new constitution in July 2011 and followed it with elections that November, leading to a new coalition government. “The success of the roadshow and investor demand for the 10-year tranche, but also for the longer maturity, illustrate well the confidence in our country, our progress over the past decade, and most of all the potential for the future.”

Instead of politics, he says most questions were about current and fiscal deficits, subsidies, methods of financing, and sources of economic growth. Deficits have risen since 2011 through higher oil prices and government subsidy policy, but Baraka argues that “these higher deficits are temporary since the government has already taken some action to address them by starting to reform the subsidy system.” The government targets a drop in the fiscal deficit to 3% of GDP, and the current account deficit to 5 or 6%, by 2016.

Further south, the standout M&A deal of the year was Chinese company Jinchuan’s ZAR9.112 billion acquisition of Metorex. It told us a lot about the changing nature of Chinese acquisition in resource-rich Africa.

Metorex is a Johannesburg-listed metals and mining company whose main attraction is its range of copper and cobalt assets in the Democratic Republic of Congo and Zambia. In 2011, after sifting through a number of bids, the board recommended to sell to Brazil’s Vale, on condition that Metorex disposed of its interests in a copper processing facility in Zambia.

Ordinarily, that would have been that. “Vale had the deal sewn up except for one or two elements of detail, one being shareholder approval,” recalls Brad Webber at Standard Bank in South Africa, Metorex’s adviser. “Everything else was done and dusted.”

And then in came Jinchuan Group, the Chinese mining company. In July 2011 it stormed in offering a 21% premium to the Vale offer. Getting over the finish line would take until January 2012, hence its inclusion in this year’s write-up rather than last, but in the moment of that audacious bid the usual rules of Chinese engagement had changed.

“What was phenomenal for us was to see the Chinese entering into a competitive process and taking an extremely aggressive approach to the transaction,” says Webber. “Pricing was neither here nor there; there was a number they had to beat and they beat it significantly. A lot of Chinese companies don’t like competitive processes, because they don’t like pressurized due diligence processes, and they don’t like to lose in deals.” Indeed, Chinese buyers tend to be notorious for agreeing to a due diligence timetable and then seeking repeated extensions of it as they fastidiously check their asset. This approach was dramatically faster and more boisterous.

It was all the more surprising because one could hardly find a more complex theatre in which to buy. “The deal had substantial complexities given that it involved two competing offers in a complex approval regime covering multiple jurisdictions,” says Webber. “Both processes required 75% shareholder approval, numerous third party and joint venture party consents and South African, Zambian and DRC regulatory consents.” Expecting to accept the Vale offer, Metorex was already well advanced in disposing of the Zambian asset. And on top of that, this was the first offer to be made under the new South African Companies Act, with no precedents for a competing offer scenario. The deal required approvals and consents in Zambia and DRC from joint venture partners, ministers and regulators during a period of considerable political uncertainty: both Zambia and DRC were amid presidential elections, in Zambia’s case leading to the swearing in of a new President. And all of that’s before considering the Chinese regulatory approval processes; that alone took four months.

“It was extremely challenging,” says Webber. Gécamines, the DRC state mining company, “have in the past caused lots of issues in transactions, and ultimately you need their approval in the deal. The Chinese approached that in a very open-minded way, and were willing to engage with them.”

The deal did get away, and Jinchuan got its asset. A Chinese company, with the state behind it, is perhaps particularly well placed to deal with the many complexities of Congo mining: both political and in terms of labour and infrastructure. And for Metorex, “it was perfect timing: the copper price was at an all time high then, there were multiple bidders.”

And has it changed the nature of Chinese M&A in Africa? Well, in January China showed that it’s still prepared to walk away from a deal if the metrics aren’t right. China National Gold pulled out of talks to buy a majority stake in African Barrick Gold, which owns four mines in the north of Tanzania. Chinese miners will be aggressive, it seems, but not at any cost.