Like other banks in the United Arab Emirates, Abu Dhabi Commercial Bank benefited from state support when in 2008 the ministry of finance provided it with long term deposits as way of assisting the financial system. The following year the ministry gave banks the option of converting these deposits into subordinated debt, which they duly took.
By 2013 these loans had begun to step down and only 60% of ADBC’s Dh6.6bn loan counted as capital under Basel II. Meanwhile the thirst for emerging market debt among international investors had grown to unprecedented levels, fuelled by rush of central bank liquidity, via quantitative easing, and a hunt for yield. ADCB saw a perfect opportunity to use the capital markets to replace the government loan with bond debt and at much more attractive levels.
In February it sold its first conventional dollar bond in the international market since 2009. The dual tranche transaction comprised a $750m five year senior and $750m 10 year subordinated tier two tranche and drew over $6bn of total orders.
“We raised debt at yields of 2.5% and 4.5% to help replace a loan that would have cost 5.25% from April 2013 to its final maturity in 2016,” says Rajesh Raheja, head of asset liability management and debt capital markets funding at ADCB in Abu Dhabi. “Plus we extended the maturity of the funding from 2016 out to 2018 and 2023.”
Compared to the yields on offer to EM issuers just a few months later the deal looks even more of a success.
“They paid 4.5% for a 10 year sub deal and analysts are suggesting 10 year US Treasury yields will be 3% or higher by the start of next year,” said one syndicate banker. “To be paying such a small margin over the US Treasury just a month after you price your deal is an incredible outcome.”
The $750m 10 year subordinated tranche repaid the Dh4bn of the government loan that still counted as capital. This new bond was fully recognised as capital under Basel II, but the issuer also specifically sought approval from the central bank that the deal will count as capital if and when the emirate adopts Basel III. The hope is that by making changes to standard tier two paperwork the borrower has issued the first Basel III-compliant lower tier two bond from the UAE.
Taking pride in pole position
ADCB was the first UAE borrower to combine senior and sub tranches in one deal and the first EM issuer to do so since 2009, allowing it take full advantage of an increasingly large investor base.
“Packaging the two tranches together allowed us to target a broader range of investors: those that like long dated debt, those that like high quality senior bank debt and those that like higher yielding sub debt,” says Kevin Taylor, EVP group treasurer at ADCB.
Not content with relying on the dollar market for its bond debt, the bank also turned to the Swiss franc market for another subordinated deal. Swapping Swiss francs into dollars and dirham provided cheaper funding that what was available in those two currencies and additional investor diversification into the bargain. It was also another illustration of ADCB’s role as a trailblazer in the emirate.
“Historically, we’ve prided ourselves on being the first bank in the UAE to do things; we were the first conventional bank to issue a sukuk, the first to print a sub deal in Swiss francs and the first to package senior and sub tranches in one deal,” says Taylor.
ADCB’s next move will depend on balance sheet growth and a supportive backdrop. “Because of investors’ views on rising rates there’s more interest in the FRN market and we’re seeing interest at the shorter end of the curve in particular,” says Raheja.
Taylor adds that diversifying into other currencies like Aussie dollars is another possibility, but clearly it would have to make sense for ADBC from a pricing standpoint and it would depend on the overall market movements.
However, despite the recent round of turmoil in emerging markets there is little reason to think ADCB will have any problem breaking into new markets and drawing new buyers with its credit story. The bank boasts a tier one capital ratio of over 16% and has strong government ownership on its side. Fixed income investors may have become more careful in their approach to emerging markets but as a first class financial institution in the UAE the bank caters to the cautious buyer.
“When investors turn away from the established markets they’re still looking for political and financial stability,” Taylor says. “Over the last few years investors have better understood that Abu Dhabi is able to offer just that.”