Structure

First Energy Bank (FEB), a Bahrain-licensed wholesale bank operating under Islamic principles, was created in June this year with paid-up capital of $1bn. Its founding shareholder is Gulf Finance House (GFH). Its mandate is to offer finance to companies operating within energy markets in the GCC, Asia and North Africa.

Based in Manama and operating as a joint stock company, FEB’s main shareholders comprise heavy-weight investors from across the GCC and North Africa. No single shareholder holds more than 10 per cent of the bank’s stock.

FEB aims to be world’s first Islamic investment bank that is wholly focused on the energy sector. The bank has a sharia supervisory board and a board of directors comprising 13 members who sit on three board-appointed committees: executive and investment; audit and risk management; and remuneration, nomination and governance.

FEB named two new senior executives in October 2008. Mohamed Shukri Ghanem was appointed deputy chief executive officer (CEO) - chief investment and business development officer; and Mohammed al-Nusuf was named deputy CEO - chief placement officer. Ghanem brings a specialisation in North African financings. He is a son of former Libyan prime minister Shukri Ghanem, who is CEO of state energy company National Oil Corporation (NOC).

Operations

FEB’s core activity in energy includes direct equity investments, the acquisition of shares in private companies, Islamic finance, financial advisory services and asset management.

FEB will act as investor, financial partner and adviser for projects and transactions in a range of energy-related sectors.

Regional companies that already serve the energy sector, but lack the necessary resources to expand, will also be targeted for investment.

This remit reflects the priorities of the bank’s key backer, GFH, which has sought to set up new financial institutions specialising in sectors including telecoms and infrastructure.

The energy sectors FEB is targeting include oil and gas exploration, production, processing, transport, storage and refining, as well as oil field services, petrochemicals, electric power and alternative energy.

Ambitions

FEB has set itself a target of generating a net profit of $107m and a return on investment of 11 per cent in its first year of operation, although this target was announced before the worst of the global liquidity crisis. The bank’s investment activities will cover five main areas.

The first is energy development projects, consisting of equity investments and underwriting for new energy projects that are in the early stages of development, where the bank can act as principal or joint venture partner.

Equity positions in these projects may be subsequently syndicated through a private offering or offered to the public through an initial public offering (IPO) within two years of initiating a successful development opportunity. These projects are expected to yield the highest rates of return to the bank. It will also co-invest in early-stage development projects alongside strategic investors that will lead and manage the development activities.

Another area of investment activity is acquisitions of business lines or portfolios of assets that are non-core to companies, or acquisitions of those banks that need to divest due to financial constraints.

Corporate acquisitions are another key area of investment for FEB. This activity will focus on acquisitions of public or private companies that are wrongly priced or undervalued in their market, and where value can be added through more efficient structuring.

In addition, FEB will look at mezzanine capital opportunities - exploiting potential funding gaps - that provide a stable risk-return profile. This area of investment will be explored for larger transactions where there are gaps between senior international debt, Islamic debt tranches and debt maturities.

The company’s first major foray has been to form a new offshore drilling and services company, Menadrill, announced in July this year. This is an ambitious bid to found a home-grown Middle East oil field services outfit to capture growing demand for oil and gas drilling.

FEB is considering a listing in Bahrain, although a flotation on the UAE or Kuwait bourses is also possible within the first few years of operation.

MEED assessment

FEB’s aim is to capitalise on the energy sector’s demand for investment. Esam Janahi, chairman of FEB, quotes the International Energy Agency’s estimates for energy infrastructure capital expenditure requirements in the Mena region as exceeding $56bn a year from now through to 2030. These figures indicate that there is space for a well-connected, specialist investment bank to put together tailored financing solutions to the industry.

The presence of prominent Gulf investors, particularly GFH, suggests the bank’s confidence is well-founded. FEB’s offering of capital and industry expertise, tapping into respected strategic partners such as the US’ PFC Energy, should reap rewards. The bank’s sharia compliance provides another layer of specialisation that may attract Mena clients.

However, FEB’s confident forecasts about the potential size of the Mena energy bounty is open to challenge.

The bank’s success depends on the appetite of private developers to continue to seek capital and development advice in what may be less favourable economic circumstances than over the past few years. The FEB model is based on the assumption that energy prices will remain high, allowing investors to target long-term returns.

Should the price climate prove less positive, that model may need to be revisited. On the other hand, a bearish commodity price climate may also make it easier for FEB to make strategic acquisitions as asset prices decline.

Key Facts: First energy bank