Exclusive: Abu Dhabi to rein in state firms' bond binge
ABU DHABI (Reuters) - Abu Dhabi plans to curtail bond sales by state companies and review the investments they hold to ease through the sale of sovereign bonds and ensure the firms' actions benefit the economy.
The plan to centralize fundraising and crack down on undisciplined issuance in the biggest of the seven United Arab Emirates has been in the works for at least six months and may take another year to complete, several people familiar with official discussions told Reuters.
Top officials are keen to improve accountability and discipline in state-owned firms, some of which have been described as "mini-fiefdoms."
That means the Department of Finance will become forceful in exercising its authority -- until now often bypassed by companies -- and control over purse strings. The debt management office (DMO), part of the finance department, will direct bond issuances from Abu Dhabi.
The review will affect Abu Dhabi's high-profile investment vehicles Mubadala, International Petroleum Investment Co (IPIC), Aabar, Tourism Development and Investment Co (TDIC), the sources said.
"(Government officials) feel a vacuum exists between them and the people running the show," said a banking source.
Abu Dhabi has been unable to print another sovereign bond since its $3 billion, five and 10-year April 2009 debut issue because its state-linked firms have accessed markets, draining away limited liquidity, bankers said.
The banking source said the Abu Dhabi bond may be issued later this year or early 2012. It may be followed by the United Arab Emirates' first federal sovereign bond.
The part of the review that looks at investments will be reassessing the value of the state-linked firms' holdings, some of which are household names.
Currently, portfolio assets at Mubadala, IPIC and Aabar, which recently bought in as a cornerstone investor in Glencore's IPO, range from stakes in Daimler and Virgin Galactic to General Electric and Spain's Cepsa.
"The basic premise of the process is to have a look at the (global) investments made by these firms and assess if they make sense to the economic development of Abu Dhabi," said a second source involved in the discussions. "In whether they help create jobs, build local expertise. If that doesn't happen, these assets will be eventually sold."
The Abu Dhabi government did not respond to requests for comment. Mubadala declined to comment. Officials at IPIC and Aabar were not immediately available for comment. A TDIC spokeswoman said she was unable to immediately comment.
Abu Dhabi's investment firms are among the most high-profile issuers in the Gulf Arab region and regularly tap bond markets to fund their ambitious investment plans.
But Abu Dhabi has been concerned about the arbitrage trade across bonds issued by these firms and believes that streamlining issuance through a single window will make it easier for the emirate to issue debt in the near future.
IPIC launched a two-part $3.48 billion euro-denominated bond with a 5 and 10 year maturity, and a 15-year 550 million pound bond in March, while Mubadala raised $1.5 billion also in a dual-tranche 5 and 10-year bond last month. It issued a smaller yen-denominated bond in March.
Listed developer Aldar and troubled green energy firm Masdar are also under review. Aldar was bailed out in a $5.2 billion deal with support from Mubadala earlier in the year.
Aldar declined comment. Masdar was not immediately available.
There is no debt restructuring involved, the people said speaking on condition of anonymity due to the sensitivity of the issue.
"Abu Dhabi has none of the debt issues its neighbor Dubai faced during the crisis," said the second source. "Having said that, there is a move to create a bit more discipline among investment firms and streamline debt issues."
The Abu Dhabi Investment Authority, among the world's largest sovereign wealth funds, is not subject to the review.
Abu Dhabi wants to avoid the spectacular debt crisis in Dubai which occurred partly due to heavy borrowing by state firms, largely unsupervised by a central body and which lenders considered to be backed by implicit sovereign guarantees.
Abu Dhabi has explicitly said it would back its state-owned firms, but also wants to ensure it is not on the hook for bad borrowing or investment decisions, the people said.
In 2009, Abu Dhabi bailed out neighbor Dubai, helping the flashier emirate avoid a debt default at the 11th hour.
Abu Dhabi officials also want investments to be more cohesive and make strategic sense.
NO SPECIFIC MANDATES
Both foreign and local entities have been presenting proposals to the government.
Among them are Dubai-based investment bank Shuaa Capital and National Bank of Abu Dhabi as well as McKinsey & Co. Dubai-based advisory firm Essdar Capital is one of the few with a mandate in hand already on the debt management side.
McKinsey, NBAD and Shuaa all declined to comment. Essdar was not immediately available for comment.
In a bid to use local expertise and boost its advisory profile, NBAD, which is 70-percent owned by the government, is taking a prominent role.
The review will assess Abu Dhabi's portfolio and may lead to "drastic actions," said the second source, adding that Abu Dhabi has no intention of selling its domestic assets to third parties.
(Additional reporting by Shaheen Pasha, Martin Dokoupil, Praveen Menon and Martina Fuchs in Dubai, Stanley Carvalho in Abu Dhabi and David French in London; editing by Reed Stevenson and Andrew Callus)