MIDEAST DEBT-GEMS compromises on size, price with hybrid sukuk
* Second USD hybrid bond issue by Gulf firm other than bank
* Unrated company was selling in soft market
* 12.00 percent profit rate at wide end of price thoughts
* $200 mln size was $100 mln less than ideal size target
* But Asian, European accounts bought as well as Gulf
By Abhinav Ramnarayan
DUBAI, Nov 17 (IFR) - Corporate hybrids appear to be in vogue in the Gulf after Emirati schools operator GEMS Education last week followed Saudi Arabia's Almarai and the United Arab Emirates' Majid Al Futtaim in issuing bonds that also receive equity treatment.
On Thursday, GEMS Education issued a $200 million, perpetual non-call five hybrid sukuk, though the deal came with one of the highest yields from a Gulf issuer. It was only the second U.S. dollar hybrid bond issue from a Gulf company other than a bank.
But investors needed some convincing to put money into a subordinated bond from an unrated company, and GEMS Education had to compromise on size and price.
The par-priced deal came at the wide end of initial price thoughts of 11.75-12.00 percent and raised $100 million less than its ideal target.
The market was soft in the first half of the week which, together with the structure, meant the deal was a tough sell with the execution process stretching over three days. Making matters harder for the leads was the fact there were no obvious peers.
"When we first starting talking to investors, they were saying the deal could price anywhere between 8 percent and 12 percent," a banker close to the deal said.
"But then the market drove them to the 12 percent level and the issuer had the maturity to take it."
A rival banker said: "I wouldn't have started any tighter, despite the very generous (profit rate). They don't have any benchmarks around that name. If you want institutions to buy the company, you need to offer a good three or four points over Majid Al Futtaim."
MAF, rated BBB/BBB, last month issued a $500 million, 7.125 percent perpetual non-call five note at par. On Thursday, that note was trading at 98.5 to yield 7.5 percent, according to Tradeweb.
"I don't agree that investors looked at MAF. That's a much bigger and rated company. There are no real obvious peers for (GEMS), so in that sense it was a true price discovery process," a lead banker said.
"When we went to market we said clearly the deal size would be $200 million to $300 million, so the deal was in line with that."
While there are no official allocation statistics, a large part of the buying was from the Gulf region, but Asian, London and Swiss accounts also participated.
By investor type, it was a good mix of asset managers, private banks and local banks, the lead banker said.
The profit rate on the mudaraba steps up by 500 basis points if the notes are not called. There was a 50 cents private bank rebate.
GEMS is run by Sunny Varkey, owner and chairman of the group. Buyout firm Abraaj bought a 25 percent stake in 2007, but restructured the holding into a loan instrument in 2011, Abraaj said at the time. That loan has now been taken out.
The business thrives on a desperately underserved market for education in the UAE and many Emiratis have money to spend.
Abu Dhabi Islamic Bank, Credit Suisse and Morgan Stanley were the bookrunners.
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