Not many firms can claim to have completed $14bn of transactions in 2012, including eight deals during a particularly busy 20 days in December. But that is not the end of the funding requirements of Abu Dhabi government-owned investment vehicle Mubadala Development Company. This year, it will finance the $5bn second phase of its Emirates Aluminium (Emal) project, refinance its $2bn revolving credit facility, and launch a variety of other deals to finance its investment projects in the region and globally.
Focus [is] on optimising the capital structure of the project, not maximising debt levels or minimising pricing
Kelly Thomson, Mubadala Development Company
While there is clearly a contraction under way in the project finance sector, Mubadala is showing that funding is still available for the right projects. Kelly Thomson, head of structured finance for the firm, says that one of the keys to Mubadala’s success is its in-house relationship banking model, which it has dubbed Musharaka. The backbone of this is a computerised log of every meeting, phone call and interaction with its relationship banking group.
“We can run reports of where each bank ranks in terms of how much money they have lent to us, how much they’ve been paid in fees, and interest,” says Thomson.
The system allows Mubadala to back up its claim that it works hard to ensure it maintains a mutually profitable relationship with its lenders. “Everyone knows that there are probably fewer banks today lending in project finance,” says Thomson. “That means managing the relationship and expectation of your banks is more important than ever if you want to successfully finance a multibillion-dollar project.”
Another element in Mubadala’s approach that sets it apart from some other borrowers in the region is it less focused on beating the terms of the last comparable deal. “We firmly believe that we should focus on optimising the capital structure of the project, not maximising debt levels or minimising pricing,” says Thomson. “It is not sustainable in the long term to try and squeeze every last basis point out of the banks. But at the same time we are not going to take at face value what one bank says is the market price.”
With a large pipeline of future projects, Mubadala knows it is not in its interests to focus too much on reducing prices, especially as project finance plays a key part in its model. “We make investments with a view to them becoming profitable in and of themselves,” says Thomson. One of the ways Mubadala tries to ensure that discipline from the beginning of a development is focusing on funding at the asset level, rather than relying on the benefits of raising cheap debt based on the parent company’s Abu Dhabi government ownership.
Mubadala is also keen to develop new funding sources, particularly the bond markets. Later this year, it plans to issue one of the region’s first greenfield project bonds to fund the new Emal project. If the deal is a success, it could open the door for other projects to raise money through the bond markets.
“We have been working on project bonds for a while. We think it is an incredibly important debt product that needs to be developed,” says Thomson. “It has never really made sense for commercial banks to be asked to lend 25-year money. Institutional investors and pension funds have much longer timeframes that they look at in terms of matching their assets and liabilities and they are the people that should be investing in project bonds.”
Thomson is well aware that the region’s bond market is still not ready to play a major role in funding projects. “There is a lot of liquidity that needs to be invested and a lot of corporate issuances are constantly coming to the attention of investors,” she says. “If you compare a bank transaction that has been structured for 15-18 months, then gone through a market sounding process befoe you approach banks with a fully baked package, you probably have up to two years to finish the whole process. For bond investors they get 45 minutes to understand a 400-page prospectus and decide whether to invest in that project bond or do a more easily digestible corporate deal.”
Despite this, Mubadala views the capital markets as an important option and the firm has a strong track record with investors, who are familiar with its corporate deals or other transactions such as the $1.3bn Dolphin Energy refinancing of early 2012 in the bond market.
“Being able to demonstrate to banks that, although they are signing up for a 15-year deal, we have a history of refinancing those credits in the capital markets is very important. The Dolphin refinancing was a good example of how we have shown banks that we are going to do what we tell them, and refinance their loans in the capital markets.”
A combination of not being overly aggressive on pricing, a commitment to the bond markets and ensuring banks are treated fairly and offered other profitable work has helped Mubadala get its deals done even as bank appetite for project finance has dwindled. During 2013, it will have several more opportunities to test this model further.
$5bn: Value of the second phase of the Emirates Aluminium project
$2bn: Value of Mubadala’s revolving credit facility that will be refinanced in 2013