1. August, 2009
Financing – Overview
Abu Dhabi
CONFIDENTIAL
Copyright © 2009 Mahender Bisht

2. Contents
I. Capital Structure
II. Financing Options
III. Financing Process
IV. Financing in Middle East
2

3. Capital Structure
The Need for Capital
 The goal of a Firm is Value Creation
Revenue
Value
Investment
Creation
Working Raw materials
Capital assets Labor Taxes
capital and supplies
 Value is measured by the Cash produced by a firm
 A firm must generate Revenues to produce Cash
 Revenue generation requires Capital to establish and operate the firm‟s business
3

4. Capital Structure
Sources of Capital
 A Firm‟s Capital requirement can be met externally or internally
 Capital provided by a third-party
Debt  Allows first-claim on cash generated by the Firm
 Obligation to repay a fixed amount by a certain date
External
Capital
 Capital provided by the owner(s) of the Firm
Owner’s
Equity  Gives Owner(s) full claim on the Firm‟s earnings,
after payment to debtor(s)
 Capital generated by the Firm and retained after
Internal Retained payment to external capital providers
Capital Earnings
 Most preferred source of financing, if available
 Other sources of capital also exist, depending on business situation
‒ For example, factoring (selling account receivables), asset liquidation, working capital
(delaying supplier payments, securing advance payments from customers) etc.
4

5. Capital Structure
Cost of Capital
 Given the availability of different capital sources, cost of capital becomes a key
determinant for choosing the capital source
 Cost of Capital has financial as well as non-financial aspects
Equity Debt Retained Earnings
 High financial cost – equity  Lower financial cost than  Minimal financial cost
holders carry high risk and equity  Reduces the dividend
hence demand appropriate  Reduces agency costs payment to equity holders
payment
‒ Managers must choose  Introduces agency cost
 Introduces agency costs projects that deliver returns ‒ Managers may select
‒ Managers may select sufficient to service debt negative NPV projects over
negative NPV projects over  Introduces Bankruptcy costs positive NPV projects to
positive NPV projects to minimize own effort and
minimize own effort and ‒ Firm might be forced to
liquidate assets or give-up risk
risk
control in case of missed  Zero transaction costs and
debt-service payments easily available
 Increases firm value by
amount of tax-deductible
interest payment
Least Most
preferred preferred
5

6. Capital Structure
Optimal Capital Structure
 The value of the firm can be thought of as a pie
30%
 The goal of the manager is to increase the size of the pie Equity
(from equity holder‟s perspective)
70%
 Everything else the same, cost of capital employed can Debt
increase the value of the firm
 The most appropriate measure of a Firm‟s capital cost is the Weighted Average Cost
of Capital (WACC)
 The Weighted Average Cost of
Capital (WACC) measures the WACC Value
cost of each component of
financing
– e.g. debt and equity
WACC Value
– weighted by its relative size
6

7. Capital Structure
Optimal Capital Structure (contd.)
 The Optimal Capital Structure minimizes the WACC and hence maximizes the
firm value
Ke Ke = Cost of Equity
Kd = Cost of Debt
WACC
Capital Kd
Costs
Debt as % of
market value
 A change in leverage changes the risk profile and Cost of Capital of the firm
 Even though Cost of Debt is lower, the benefits of borrowing have to be weighed off against
the cost of higher leverage
‒ Inability to service debt may lead to financial distress and ultimate liquidation
7

8. Contents
I. Capital Structure
II. Financing Options
III. Financing Process
IV. Financing in Middle East
8

9. Financing Options
Debt Finance
 Basic loan – contract between a borrower and a lender (typically a bank)
 Syndicated loan – contract between a borrower and a syndicate (group) of lenders
Loans  Typically short terms (less than 5 years) with principal repayment typically during the bond‟s life
(on a regular basis)
 Can be publicly traded or be used as collaterals for other structured products by the lenders
 Issued by a Company (or Government) directly to Investors (or public)
 Can be traded on public exchange
Bonds  Typically longer terms (5 yr, 10 yr, 30 yr)
 Typically principal repayment at the end of bond term
 Typically an agreement with a between a buyer and a supplier to use assets without upfront
payment
 Repayment during the term of the lease
Lease
 Can be Operating lease (off-balance sheet) if term is shorter than the useful life of asset leased
9

10. Debt Finance
Key Characteristics of Debt
 Fixed rate – guaranteed payment amounts throughout debt term
Coupon /  Floating rate – typically, reference rate (e.g. T-bonds) + spread
Interest rate  Zero coupon – no interest payments; debt sold at a discount to face value
 Coupon payment dates (monthly / quarterly / semi-annually / annually)
Payment
 Principal repayment – at the end of term or with coupon payments
schedule
 Secured debt: asset-backed, mortgage-backed
 Non-recourse debt: claim limited to collateral used as security
Security
 Unsecured debt: no collateral
 Order in which creditors can lay claim on borrower‟s asset in case of liquidation
‒ Senior debt: Priority over other unsecured debt
Status ‒ Subordinated debt: Lower priority than senior debt
‒ Mezzanine debt: Lower priority that other debt but higher than common shares
 Agreements to protect debt-holders
Covenants / ‒ Negative covenants restrict debtor from taking certain actions (e.g. issuing more
senior debt)
Call Provisions
‒ Positive covenants encourage debtor to take certain actions (e.g. use asset-sale
proceeds to buy other assets only)
10

11. Financing Options
Equity Finance
 Equity
– Basic types of equity
- Preferred stock
- Common stock
– Basic characteristics of equity
- Terms of preferred stock
- Liquidation value
- Dividend preference
- Terms of common stock
11

12. Contents
I. Capital Structure
II. Financing Options
III. Financing Process
IV. Financing in Middle East
12

13. Financing process
Overview
 The process of obtaining Finance depends on the type of finance
 As a first step, target capital structure (Debt / Equity ratio) must be defined
– Appropriate finance (Debt or Equity) should be issued to meet capital structure
 External equity is typically raised via
– Initial Public Offering
– Equity Private Placement
– Private Equity / Venture Capital
 External Debt is typically raised via
– Debt Private Placement
– Public Bond Offering
 In this section, we cover the process of raising External Debt
13

14. Debt Financing
Process overview
Advisor selection Credit Rating Debt offering
Strategy & Rating
Due Diligence
Preparation decision
 Information  Rating agency  Information
gathering presentation gathering
 Rating agency  Due diligence by  Due diligence
selection Rating agency
 Rating agency
 Meeting with selection
rating analysts
Strategy Preparation Issuance
 Decide on debt  Appoint issue  Secure
requirements managers / commitments
(size, maturity, underwriter from participants
service capability
 Prepare support  Finalize issue
etc)
materials size by tranche
 Secure approval
 Prepare bid book  Legal & financial
from board of
documentation
directors
The same process applies to both public and private debt placement
14

15. Raising Debt Advisor selection
Credit
Rating
Debt
offering
What is Credit Rating?
 A credit rating assesses the credit worthiness of an individual, corporation, or even a country.
Credit ratings are calculated from financial history and current assets and liabilities
– Sovereign rating: Assess the country credit risk; used as a point of reference for country
borrowings from WB, IMF, ADB, IDB
– Entity rating: Risk rating of Corporate entities
– Instrument rating: Rating of the bonds issued by different corporations and municipalities
 A credit rating tells a lender or investor the probability of the subject being able to pay back a loan
 Poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates
 Major Credit Rating Companies:
– Standard & Poor‟s
– Moody‟s
– Fitch Ratings
15

16. Credit Rating
Benefits of Credit Rating
 Investors use ratings in several different ways, which provide value to Issuers also
 For Investors, Credit ratings are:
– A source of additional certification
– A source that forewarns risk
– A guide for pricing securities
 For Issuers, Credit ratings:
– Increase the investor population
– Encourage financial discipline within the organization
– Lower the cost of borrowing
– Provide a marketing tool
– Make foreign collaborations easy
 In summary, Credit ratings benefit the industry as a whole
16

17. Credit Rating
The process to get „rated‟
 Obtaining a Credit Rating for the first time is a 3-step process
Issuer / Credit Rating
Borrower Agency
Assigns analytical team,
Requests for a Rating
Step 1: Strategy & conducts basic research
Preparation
Collects additional
Prepares documents
information
Rating presentations, site visits,
Step 2: Due Diligence management meetings
Rating Committee assigns
rating
Appeal Rating decision
(if required)
Step 3: Rating decision Communication of Rating to
& Communication Issuers
Dissemination of rating /
publication
Follow-up step: Surveillance & Annual
Constant Review Review
17

18. Credit Rating
Rating methodology
 Rating Agencies follow a rigorous methodology to assess Issuers seeking rating
– Financial and legal due diligence
– Site visits
– One-on-one meetings with management and key personnel
 Following major factors are assessed in the Credit Rating process:
Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
 Ownership & support  Capital & Debt structure
 Management Evaluation  Funding & Flexibility
 Corporate Governance
18

19. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Industry Risk assessment – Key considerations  Corporate Governance
 Economic importance of the industry to the country
 Potential for support
 Employment significance
 Industrial relations record
 Significance of legislation: protective / harmful, relationship with government
 Maturity of the industry
 International competition
 Barriers to Entry
 Competitive situation domestically: monopoly, oligopoly, fragmentation
 Nature of the industry: capital intensity, product lifespan, marketing requirements
 Cyclic factors: demand, supply, implications for price volatility
 Industry cost & revenue structure: susceptibility to energy prices, interest rate levels, government
policies (subsidies etc)
 Important developments and trends in the industry
19

20. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Market position assessment – Key considerations  Corporate Governance
 Competitive position within the industry: size, market share & trend, price-setting ability
 Major product importance
 Product lives and competition
 Degree of product diversification
 Significance of R&D expenditure and of new product development
 Geographic diversity of sales and production
 Significance of major customers
 Dependence on major suppliers and access to alternatives
 Marketing needs
 Distribution network, control and susceptibility to external factors
 What are growth trends, and sources of growth?
20

21. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Ownership & Support assessment – Key considerations  Corporate Governance
 The specific issues include:
– Ownership of the entity
– Relationship with the owners, autonomy, control
– Financial strength of the owner(s)
– Potential for support and / or fund withdrawals
– Structure of ownership
– Other benefits: access to technology, products etc
– Access to capital markets
21

22. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Management evaluation – Key considerations  Corporate Governance
 The specific issues include:
– Record to date in financial terms
– Corporate goals and outlook: aggressive stance, attitude to risk
– Experience, background and credibility
– Depth of management: key individuals, succession
– Record compared with peers
22

23. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Corporate Governance assessment – Key considerations  Corporate Governance
 The independence and effectiveness of the Board of Directors
 Oversight of related party transactions that may lead to conflicts of interest
 Board oversight of the audit function
 Executive and Director remuneration
 Complex holding company structures
 Ownership by private individuals and families
 Other aspects of Corporate governance whose impact on bondholders is less clear-cut – e.g.
ownership by executives and directors
23

24. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Earnings & Performance assessment – Key considerations  Corporate Governance
 Consistency and trend of core earnings
 Earnings mix by activity and geography
 Exceptional and extraordinary items: non-recurring impacts of past earning levels
 True earnings available for cash flow: equity accounting, restrictions on profit repatriation
 Internal growth vs acquired earnings
 Profitability and protection measures
 Profit margins
 Interest and pre-tax coverage measures
 Dividend cover, payment levels and future policy
 Taxation situation – effective tax rate, specific relief
 Sufficiency of retained earnings to finance growth internally
24

25. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Cash Flows assessment – Key considerations  Corporate Governance
 Relationship of cash flows to leverage and ability to internally meet all cash requirements is
evaluated. The volatility of cash flow over time and the impact of seasonality on cash flow is also
assessed
 The specific issues include:
– Adequacy of cash flows to maintain the operating capacity of the business: working capital
levels, replacement of fixed assets etc
– Contribution from cash flow towards expansion – major capital spending projects, acquisitions
– Discretionary spending included in cash flow including advertising, exploration, research &
development, etc
– Volatility of cash flow over time
– Relationship between cash flow and total debt
– Restrictions on cash flow: limits on repatriation, potential tax effects, access to dividends from
subsidiaries
– Liquidity levels and fluctuations: seasonality, sensitivities
– Working capital management and measurements
25

26. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Capital & Debt Structure assessment – Key considerations  Corporate Governance
 Debt / Equity measures: historic, present and projected
 Leverage (total liabilities / equity) measures: historic, present and projected
 Sensitivity analysis on projected levels
 Seasonal variations
 Coverage measures on interest and leasing
 Adjustment for off-balance sheet items
 Appropriateness of capital structure for the business: over-reliance on short-term
funding, sensitivity to interest rate changes
 Debt structure: Type, maturity, currency, service schedule, covenants, security, default clause
26

27. Non-Financial factors Financial factors
 Industry Risk  Earning & performance
 Market position  Cash flows
Credit Rating Methodology 

Ownership & support
Management Evaluation


Capital & Debt structure
Funding & Flexibility
Funding & Flexibility assessment – Key considerations  Corporate Governance
 Flexibility of planned financial needs: capital spending, dividend levels, acquisitions etc
 Ability to raise additional financing under stress
 Back-up and standby lines of credit: periods and covenants of underwriting facilities and committed
lines, bank relationships generally
 Ability to attract capital: shareholder make-up, access to equity markets
 Capital commitments
 Margin of safety in present and planned gearing / leverage levels
 Asset make-up: nature of assets and potential for reductions or disposals under stress, scalable
units
 Off-balance sheet assets and liabilities: goodwill or other intangibles written off, undervalued
assets, pension under funding
27

28. Credit Rating
Due diligence – Documents required
Indicative summary of required documents
Company Profile Financial Section
 Overview of Company history  3 years (ideally, but Rating Agencies flexible
 Shareholder structure on this point) of consolidated IFRS audited
financial accounts, including P&L, Balance
 Corporate organizational and legal charts Sheet, Cash Flow Statement and notes
 Breakdown of main business areas  Consolidated Business Plan for the next 5
(Revenues, Earnings, Cash flow, Assets) years, including assumptions, management
 Information about specific projects discussion and detailed description of P&L,
Cash Flow and Balance Sheet projections
 Detailed description of the Media / Real
Estate sector in the region, including legal  Description of capital expenditure plans and
framework evolution funding policy
 Management and future strategy (e.g.  Description of cash management policy and
growth ambitions) liquidity overview (existing bank credit lines
etc)
 Overview of financial contingencies
 Current and target capital structure
28

29. Raising Debt
Debt Offering process
 Issuing debt (or any public security) is a complicated and tedious process
Issuer /
Underwriter
Borrower
Secures Board of Proposes best debt
Director approval structure
Step 1: Strategy
Draft offering prospectus
File registration statement
with listing body (if required)
Step 2: Preparation Define an issue price (guide)
Identify potential investors /
and host road show
Prepare bid book / record
orders
Step 3: Issuance Decide size of issue and
final price
Complete legal and financial
documentation
29

30. Debt Offering
General cash offering
 Almost all debt is sold in general cash offerings
 There are two methods for issuing securities for cash:
– Firm Commitment
- Under a firm commitment underwriting, the investment bank buys the securities outright from
the issuing firm
- Obviously, they need to make a profit, so they buy at “wholesale” and try to resell at “retail”
- To minimize their risk, the investment bankers combine to form an underwriting syndicate to
share the risk and help sell the issue to other investors / public
– Best Efforts
- Under a best efforts underwriting, the underwriter does not buy the issue from the issuing firm
- Instead, the underwriter acts as an agent, receiving a commission for each unit sold, and
using its “best efforts” to sell the entire issue
30

31. Contents
I. Capital Structure
II. Financing Options
III. Financing Process
IV. Financing in Middle East
31

32. Debt-Financing in Abu Dhabi
2009 YTD major activity
2007 - 2008 2009 YTD
Lebanon, Other, 9% Bahrain, 6 Saudi
3% % Arabia, 2 Abu Dhabi borrowers
%
Egypt, 4% Saudi
have been the most
Arabia, 20 active in the market
%
(2009 YTD)
Rest of Qatar, 36 Abu
UAE, 24% % Dhabi, 56
Dubai, 40 %
%
Date Issuer Credit rating * Amount Term (years) Coupon Spread
Mar 2009 Abu Dhabi Government Aa2 / AA / AA $ 1,500 million 5 yr (Apr – 2014) 5.500 % T + 400
Mar 2009 Abu Dhabi government AA2 / AA / AA $ 1,500 million 10 yr (Apr – 2019) 6.750 % T + 420
May 2009 Mubadala Development Co. Aa2 / AA / AA US $1,250m 5-yr (May – 2014) 5.750 % T + 395
May 2009 Mubadala Development Co. Aa2 / AA / AA US $500m 10 yr (May – 2019) 7.625 % T + 462.5
May 2009 Aldar Properties A3 / A- / NR US$1,250m 5-yr (May – 2014) 8.750 % N/A
Jun 2009 Tourism Development & Aa2 / AA / AA US$1,000m 5-yr (Jun – 2014) 6.500 % T + 390
Infrastructure Company (TDIC)
Jul 2009 Dolphin Energy Ltd. Aa3 / NR / A+ US$ 1,250m 10 yr (Jul – 2019) 5.888% T + 337.5
*: Ratings are provided for Moody’s / Standard & Poor’s / Fitch
32

33. Abu Dhabi Government
US $10bn Sovereign Bond Programme
 Credit Rating – Aa2 / AA / AA US$1.5bn 5-year tranche
‒ Abu Dhabi‟s revenue expected to be stable (dividends Asia, 6%
Other, 6
%
from ADNOC and ADIA)
‒ Will maintain budget surplus, if oil price exceeds $40 Middle
US, 25%
East, 21
%
 Total bond programme - $10 bn
Europe,
‒ Issue over-subscribed: Total interest $7bn 42%
‒ $3bn raised in Mar 2009
‒ 2 tranches of $1.5bn each (one 5-yr and another 10-yr)
US$1.5bn 10-year tranche
‒ Pricing(1): Other, 7
Middle
%
‒ 5-yr bond priced 400bps above US treasuries East, 8%
‒ 10-yr bond priced 420bps above US treasuries
 Bond purpose: Europe, US, 57%
28%
‒ General government budget expenditures
33

34. Mubadala Development Co.
US $1.75bn offering
 Credit Rating – Aa2 / AA / AA US$1.25bn 5-year tranche
‒ Rating achieved on the backing of Abu Dhabi government Asia, 6%
‒ Comparables receive lower rating
Middle US, 24%
‒ E.g. Blackstone group has S&P „A‟ rating (2 levels East, 28
below best) despite strong earnings and $91bn %
Europe,
assets under management 42%
 $1.75 bn bonds issued
‒ 5-yr $1.25bn issue at 395bps(1) over US treasuries
‒ 10-yr $500m issue at 462.5bps over US treasuries US$500mn 10-year tranche
Middle Other, 6
‒ Offering managed by Citibank, Goldman Sachs & Royal East, 12 %
Bank of Scotland %
 Purpose US, 43%
‒ Project financing (acquisitions, investments) Europe,
39%
34

35. Aldar Properties
US $1.25bn offering
 Credit Rating – A3 / A- / NR
‒ Rating reflects its strong market position in Abu Dhabi & large land bank
 $1.25 bn bonds issued
‒ 5-yr maturity with 8.75 percent fixed-coupon
‒ Higher coupon than Abu Dhabi Sovereign & Mubadala bonds
‒ Offering managed by Goldman Sachs, Barclay‟s Capital, NBAD and ADCB
 Purpose
‒ Construction project execution
35

36. Tourism Development & Infrastructure Company (TDIC)
US $1.0bn offering
 Credit Rating – Aa2 / AA / AA
‒ Rating achieved on the backing of Abu Dhabi government
 $1.0 bn bonds issued (debut issue) US$1.0bn 5-year tranche
‒ 5-yr bond @390 bps over US treasury Asia, 12
%
‒ Offering managed by HSBC Holdings PLC, Banco
Santander Sa, Bank of Tokyo Mitsubishi
US, 30%
Middle
 Purpose East, 25
%
‒ Fund infrastructure development projects Europe,
33%
36

37. Dolphin Energy Ltd
US $1.25bn offering
 Credit Rating – Aa3 / NR / A+
‒ Rating reflects existing capital structure (70:30 debt:equity)
and ownership structure (51% Mubadala, 24.5% Total &
24.5% Occidental)
 $1.25 bn bonds issued
‒ Part of total debt package of $4.1 bn (incl. $1.6bn debt
facility and $1.2bn co-lending from Total & Occidental)
‒ 10-yr bond @390 bps over US treasury
‒ Offering managed by Royal Bank of Scotland (RBS), BNP
Paribas, Abu Dhabi Commercial Bank, National Bank of
Abu Dhabi
 Purpose
‒ Refinance $3.45 bn loan secured in 2005
‒ Finance construction costs of Taweelah-Fujairah gas
pipeline (70% of total costs)
Draft – For Discussion 37
Only