Taqa Aids Abu Dhabi Push to Diversify Debt Funding: Arab Credit

Abu Dhabi’s biggest utility and an aluminum smelter are raising as much as $2 billion by selling bonds they’ll repay with cash from projects being financed, evidence of the emirate’s effort to broaden its funding sources.

Abu Dhabi National Energy Co., known as Taqa, said it plans to complete the sale this quarter of an $800 million project bond for its Shuweihat S2 power plant. The Taqa unit would now pay about 3.5 percent on 10-year project bonds, Amol Shitole, a credit analyst with SJS in Bangalore, India, said April 16 by e-mail. That compares with an average corporate bond yield of 3.37 percent yesterday, a Middle East regional HSBC/Nasdaq Dubai index shows.

Emirates Aluminium Co., or EMAL, may sell a project bond as early as this quarter, according to Mubadala Development Co., a partner in the venture. EMAL needs money to expand a smelter, while Taqa is refinancing its Shuweihat power station in Abu Dhabi, the largest sheikhdom in the United Arab Emirates. Both state-run companies are contributing to Abu Dhabi’s effort to diversify financing options beyond bank loans and corporate bonds to attract a wider range of investors.

“Project bonds add to the repertoire of financial instruments and help create deeper financial markets,” Jarmo Kotilaine, chief economist for economic planning and development at Bahrain’s Economic Development Board, said by phone April 15. “They increase the flexibility in financing for governments and issuers.”

Dolphin Pipeline

The 3.5 percent that Shitole of SJS estimates Taqa’s Shuweihat project might pay for bonds exceeds the 2.64 percent yield on the Bank of America Merrill Lynch Global Utility Index yesterday.

The U.A.E.’s only project bonds to date are $2.55 billion in securities that Dolphin Energy Ltd. issued in 2009 and 2012 to refinance debt on a pipeline supplying natural gas from Qatar to the U.A.E. and Oman. Dolphin Energy is 51 percent owned by Mubadala, an Abu Dhabi state investor, with Total SA and Occidental Petroleum Corp. holding the rest. The U.A.E. contains 6 percent of global oil reserves, most of them in Abu Dhabi.

Middle East crude producers are expanding into industries such as petrochemicals and metals manufacturing to diversify away from a reliance on oil exports. The construction of factories and the power plants needed to supply them with electricity has attracted international joint-venture partners.

Final Arrangements

EMAL, a partnership between Mubadala and Dubai Aluminium Co., plans to raise as much as $1.25 billion in its first sale. Shitole, the SJS analyst, said it could pay 3.5 percent to 3.75 percent for a 10-year project bond. EMAL is making final arrangements to finance its smelter expansion, a Mubadala official said in an April 11 e-mail, asking not to be identified due to company policy.

“There are not many project bonds in the market,” Shitole said. “To start a new market for lending is the reason Abu Dhabi is seeking to sell these bonds. If you look at current rates, it really makes sense to go.”

Bond yields for the six Arab states of the Gulf Cooperation Council are close to their lowest level in more than eight years, according to the HSBC/Nasdaq Dubai GCC Conventional Corporate US Dollar Bond Index. The declining cost of funds prompted regional borrowers to sell more debt in the last three months than in any other quarter since 2009, data compiled by Bloomberg show.

‘We’re Happy’

Taqa, which owns stakes in North Sea oil fields, sold $1.25 billion in corporate bonds in December. The 3.625 percent bonds yielded 3.44 percent on April 14, data compiled by Bloomberg show.

“We’re happy in terms of the deal we’re getting,” Taqa Chief Financial Officer Stephen Kersley said of talks on the pricing for the new securities. “It will be a major step forward for Taqa to get project bonds into the market,” he said in a March 13 conference call.

The utility and energy producer had no additional comment on its bond sale, a Taqa official said April 16, asking not to be identified because of company policy.

Elsewhere in the oil-exporting Gulf region, two joint ventures of Saudi Arabia’s state oil producer have sold Islamic bonds, or sukuk, as did the government’s aviation administration.

Saudi Sukuk

Saudi Arabian Oil Co., known as Saudi Aramco, and its partner Total sold about $1 billion in sukuk in 2011 to pay for a refinery and chemical plant at Jubail on the kingdom’s Gulf coast. Aramco and Dow Chemical Co. sold $2 billion in Islamic bonds last year to finance their Sadara Chemical Co. joint venture, also in Jubail.

State-backed sales contribute to the creation of a sovereign debt curve, or record of bond performance, that can help smaller borrowers by providing lenders a pricing benchmark, said Fahad Alturki, a senior economist at Riyadh-based Jadwa Investment Co. “This gives more opportunity for smaller companies to enter the market,” he said by phone on April 15.

Kotilaine of the Bahrain Economic Development Board said a wider use of project bonds will give investors better access to the “success story” of the region’s economy.

“For institutional investors, it gives them a chance to invest in the large infrastructure projects in this market,” Kotilaine said. “That is a big economic theme to which many investors want exposure.”

Before it's here, it's on the Bloomberg Terminal.