TAQA tops in finding finance
When it comes to raising finance, no one has done it more this year that the Abu Dhabi National Energy Company – TAQA for short. By David French.
Overall, in the first nine months of 2008, TAQA has raised around US$8.75bn through a mixture of debt and equity. However, this figure hides the fact that US$3.1bn of that was technically raised twice, as an original loan was refinanced. In a constricted global market, being buffeted by a lack of confidence and a lack of liquidity, this amount of fundraising is an impressive feat and represents a massive amount of faith among the international banking community in TAQA.
The year had barely begun when TAQA announced its first completed transaction. That deal was a one-year corporate loan of US$3.1bn, supplied by a club of – Bank of Tokyo-Mitsubishi UFJ (BTMU), Barclays, BNP Paribas, Citibank and Royal Bank of Scotland (RBS) – and priced at a margin of 27.5bp. In all, BTMU, the co-ordinator, documentation and facility agent on the deal, put in the most cash at US$1bn, followed by RBS, which put in US$600m. Barclays, BNP Paribas and Citibank contributed US$500m each. This bridge facility was raised to fund the acquisition, announced late in 2007, of Canadian energy firm PrimeWest Energy.
Of course, being a one-year facility meant it had to be refinanced sooner rather than later and six banks were mandated in June for a new three-year US$3bn revolving credit facility priced at 65bp. Four of the five banks from the original deal – BTMU, Barclays, BNP Paribas and RBS – joined as initial mandated lead arrangers (MLAs) and bookrunners, with HSBC and National Bank of Abu Dhabi (NBAD) also involved.
After a syndication process lasting just over a month, the refinancing deal was signed on August 7 for US$3.15bn. This was slightly more than the original launch level after a strong oversubscription in general syndication, which attracted a further 10 banks on top of the original six MLAs.
Much had changed in the intervening eight months between the signing of the two deals. Capital was much harder to come by due to the squeeze being placed on global debt markets by the credit crunch. Pricing had gone up across the board and this can be seen in the fact that the margin on the second TAQA transaction was higher than on the first, despite the first being a bridge facility used for an acquisition. However, the strong commitment shown by banks in both deals exemplified the belief that TAQA was a sound investment. Even in the tight environment in which the second deal was signed in, pricing was much lower than most other borrowers were being offered at the time.
The reason TAQA was seen as such a safe bet was its close links with the Abu Dhabi government. Through two different avenues – the Abu Dhabi Water and Electricity Authority (ADWEA) and the Farmers' Fund – the Emirate of Abu Dhabi controlled 75.1% of the company. Until the sale of its 20% stake in Shuweihat CMS International Power Company in September to SumitomoCorporation, it also controlled 80% of Abu Dhabi's power generation and more than 90% of the country's water desalination capability.
Therefore, rather than just being a private company, TAQA was regarded as an essential component in the everyday running of Abu Dhabi and was treated by the financial world akin to a sovereign entity. As Standard & Poor's noted in its analysis of TAQA in January: "The relationship between TAQA and the Emirate leads us to conclude that the government of Abu Dhabi would intervene if TAQA were in financial distress." This explains TAQA's long-term rating of AA–, one grade below Abu Dhabi's sovereign rating of AA.
This attitude allowed TAQA to be one of the few companies in the Middle East able to access the international bond markets. In July, it priced a two-tranche Reg S/144a Eurobond worth US$1.5bn as part of its US$9bn medium-term notes programme. Led by Barclays Capital, NBAD and RBS Greenwich Capital, the senior unsecured notes consisted of a US$1bn five-year tranche and a US$500m 10-year tranche priced at US Treasuries plus 325bp.
S&P rated the notes at AA–, while Moody's gave them an Aa2 rating. More significantly, the Rule 144a issue was the first by a Middle Eastern company and was aimed at expanding TAQA's funding base into new areas. It also showed that, even at a time when pricing bonds was extremely difficult, TAQA had the reputation to get the deal away.
There was one drawback though. The pricing at 325bp meant that all its previous bonds were impacted dramatically and a lot of previous investors lost out. This "take no prisoners" attitude from TAQA showed how determined it was to raise the equity. However, if you look at it in a wider context, you can see why it acted in this way.
TAQA is currently embarking on a massive expansion plan, with the target of holding US$60bn of assets by 2012. It currently has about US$9bn of assets in the UAE and it has also made a number of acquisitions this year.
Following the PrimeWest Energy deal late last year, TAQA announced in July that it would be purchasing six North Sea licences from Shell and Exxon for an undisclosed fee. It followed this up by acquiring Dutch firm EnCore in August for US$5.5m cash, bringing its European assets up to around US$5bn. It also signed a number of partnership deals to develop projects in other parts of the world. These include a joint venture to develop water and power projects in South-East Asia with Oasis International Power and a US$5bn joint venture with Al-Zamil Group in Saudi Arabia.
Helping to drive this expansion is the fact that the Abu Dhabi government not only regards the firm as a key piece of state furniture but also as a prime investment vehicle to drive the reputation of the Emirate abroad. Therefore, it sees TAQA as a reflection on itself so all this acquisition activity, which will continue into 2009 and up until 2012 and beyond, is part of making TAQA a global energy player and, thereby, helping to improve the standing of the country on the international stage.
The one problem for TAQA, however, is the way that it is going about becoming a global energy power. While the ratings agencies focus on the close relationship with the government as a key factor behind TAQA's rating, they also warn explicitly about the high leverage position that the company has taken. Much of its expansion has been funded by debt – PrimeWest Energy for example – and the firm's adjusted debt to capitalisation at the end of 2007 stood at 90.10%, much higher than the likes of Chevron, which stood at 7.9% in March 2008.
Therefore, if it is truly going to become a global energy giant, to be talked about in the same league as the likes of BP and Exxon Mobil, Philipp Lotter, senior vice-president at Moody's Middle East, argues that it is going to have to start acting like one. "It's something that we're not ignoring [their high leverage]. TAQA has a fundamental credit quality of a Ba1 [compared with its actual rating from Moody's of Aa2]. If you take out of the equation all the government support, they are left with a speculative rating," Lotter says..
"The current high leverage that TAQA has is in contrast to other large oil and gas companies, which all have high fundamental investment grade profiles. The company has ambitions to be a major player within the sector, up there with the likes of BP and Exxon, so they will ultimately need to adapt to the financial policies of such firms."
One factor that Lotter points to as helping is TAQA's recent Dh4.15bn (US$1.13bn) mandatory convertible bond issue. Announced in late July, after it was first planned then pulled by the company earlier in the month, the bonds had a conversion date of September 1 and was TAQA's first convertible exercise. The shares were priced at Dh2 each, which was around two-thirds of the share price at the time, and were rated by S&P at Single A. This meant they were two notches below its credit rating but this was normal for a subordinated issue.
The mandatory nature of the conversion meant that the issue was more akin to a rights issue than a convertible bond. The short time period between issue and conversion, and the fact that no coupon was issued, point to this. However, the fact that it was done as a convertible meant there was less documentation and due diligence involved, making it easier for TAQA to raise the capital than through a rights issue.
With proposals for future Samurai bonds in Japan and a potential sukuk issue in Malaysia, TAQA seems to be following this advice and exploring equity solutions. Lotter believes this is important as while raising further debt is still a possibility, equity must play a bigger role.
"Ultimately, it is down to TAQA if they want to improve their leverage," he says. "Their convertible bond issue has strengthened their position but they remain highly leveraged and subsequent acquisitions will need to have an element of non-debt financing in order not to put further pressure on their fundamental credit quality."
Therefore, if TAQA is to continue its expansion and become a truly global player in the energy markets, it must strike a balance between growth and addressing its high debt ratio. Its government support has allowed it, to a certain extent, to punch above its weight and acquire funding on terms that it would not, in normal circumstances, be privy to. However, a further tightening of the global economy might impact on its ability to seek acquisition funding and it will have to work within itself to continue growing. It remains to be seen whether the most active issuer of 2008 will top the pile once more in 2009.