* Gulf banks have issued instruments for Tier 2 capital
* But ADIB's sukuk would be first for Tier 1 capital
* Perpetual bond would not have maturity date
* Could appeal mostly to international, not Gulf investors
* Hybrid premium could be several percentage points
By Rachna Uppal
DUBAI, Nov 6 Abu Dhabi Islamic Bank is
set to become the first Gulf Arab company to issue a hybrid
Islamic bond this week, but investors are likely to demand a big
premium for the rare structure.
The bank is expected to raise at least $500 million to shore
up its core capital, to comply with tighter Basel III global
standards for Tier 1 capital which will be introduced in the
United Arab Emirates in coming years.
In recent years, Gulf lenders including Commercial Bank of
Qatar, Burgan Bank and Saudi Hollandi Bank
have sold instruments to raise Tier 2 capital.
But ADIB's Tier 1 sukuk structure is a different animal: it
does not have a maturity date - hence it is "perpetual" - and
the principal is repaid at the discretion of the issuer.
If ADIB's issue is successful, it could pave the way for
other banks in the region to follow suit, although the
jurisdiction in which the bank is located will be important.
One banker said he believed that within the Gulf, only banks
from Abu Dhabi or Qatar could feasibly get such a deal done,
because governments there have directly supported local banks by
injecting capital through various means. This history of support
would make investors more comfortable.
The ADIB sukuk is callable at year six, according to an
investor presentation seen by Reuters, and on every periodic
distribution date after that. It will carry a fixed profit rate
of six-year midswaps over the initial margin.
Investors agree that ADIB, rated A+, will have to pay much
higher yields than it would for a fixed-term, plain vanilla
sukuk. The instrument is expected to appeal mainly to
international investors familiar with the structure, rather than
investors within the Gulf.
"Much will depend on how is it perceived in terms of the
structure. This is certainly nothing to do with prevailing
benchmark tenors and corresponding rates," said a regional
investor, requesting anonymity.
"For a perpetuity, my bosses will not allow me to splurge
the bank's money at 2 or 3 percent."
The investor added that pricing in a range of 6.5 percent to
7 percent, however, would draw interest among potential Gulf
"The timing isn't great as most banks would be almost full
on annual budgets," he said, referring to the fact that banks
will soon close books at the end of the year. "Anything below 6
percent, I'm off it."
ASIAN PRIVATE BANKS
As with other recent bank capital offerings from emerging
markets lenders, especially perpetuals from Banco do Brasil
, VTB and Gazprombank, the Asian private
bank bid is expected to be key in determining ADIB's success.
Private banks in Malaysia, which are familiar with sukuk,
are expected to play a big part.
"Being the first of its kind from the Middle East, there are
no benchmarks for where a deal like this prices. If it offers at
least 6 percent, it should fly out of the door," the banker
"What else can you buy in the region at that level? The
challenge is that the deal is unrated, which will probably put
off some accounts, but I think it will get good sponsorship from
private banks as the yield will be very attractive."
ADIB last tapped debt markets for a $500 million, five-year
sukuk in November last year; it carried a profit rate of 3.78
percent. The sukuk was bid at 105.2 cents on the
dollar on Tuesday, yielding 2.4 percent.
Yields will have to reflect the dividends which shareholders
can typically expect. ADIB shares ended flat on Tuesday, but
have gained 4.8 percent year-to-date.
"The dividend yield on ADIB equity is 7.4 percent. So this
sukuk should ideally be priced slightly below this level," said
a regional treasury source.
DEBT VS EQUITY
Several features of the ADIB sukuk qualify it more as an
equity instrument than a plain vanilla sukuk, which is usually
classified as senior debt.
The upcoming perpetual sukuk will be classed as deeply
subordinated, with proceeds used to strengthen ADIB's core
capital rather than booked as a liability on its balance sheet.
"Common equity is generally perpetual, unlike bonds and
sukuk, which typically have a defined maturity. ADIB's Tier 1
also features a discretionary profit payment, which more closely
resembles an equity dividend than a bond's coupon payment," said
Nick Stadtmiller, head of fixed income research at Emirates NBD.
"The economics of ADIB's Tier 1 notes have more equity-like
features to allow them to book the notes as capital on their
balance sheet, rather than as a liability."
ADIB shareholders approved the capital-boosting measures at
a meeting last month. The bank had a Tier 1 capital ratio of
13.45 percent at the end of June 2012, and said in its
second-quarter results that it aimed to raise this to above 15
percent in the near term.
ADIB, the largest sharia-compliant lender by market value in
Abu Dhabi, is to conclude investor meetings on Wednesday in
Zurich, after kicking off meetings last week in the Middle East
The bank has mandated itself, HSBC Holdings, Morgan
Stanley Inc, National Bank of Abu Dhabi and
Standard Chartered Plc to arrange the deal.
(Additional reporting by Mala Pancholia; Editing by Andrew