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Wed 29 Jun 2016 06:39 PM

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IPIC's 1MDB row likely driver for Mubadala merger, say bankers

IPIC and the Malaysian sovereign wealth fund are embroiled in a legal tussle over a debt restructuring

IPIC's 1MDB row likely driver for Mubadala merger, say bankers
(Getty Images)

The potential merger of Abu Dhabi state funds Mubadala and IPIC is likely to be driven by the latter's spat with Malaysia's 1MDB, according to bankers.

"It is almost certainly linked to that," said a UAE-based debt capital markets banker. "IPIC's name has been somewhat tainted by it."

IPIC and the Malaysian sovereign wealth fund are embroiled in a legal tussle over a debt restructuring, in which IPIC is claiming about US$6.5bn.

The Abu Dhabi fund has asked a London court to arbitrate the dispute, which has also delayed a long-rumoured euro bond deal.

"IPIC has tried to come to the market a few times since the dispute began, but it hasn't worked out," said the DCM banker.

Abu Dhabi's state news company WAM made no reference to the 1MDB saga when it announced the tie-up on Wednesday.

"The merger of the two companies augments the investment advantages and economic revenue for Abu Dhabi, and creates a body capable of achieving the highest level of integration and growth in multiple sectors, including energy, technology and space industry," WAM said.

The merger will create a company with assets of US$135.3bn, based on the most recent figures for each institution.

A source close to the talks told Reuters the deal was likely to be completed by the end of 2017, and was being seen as a merger of equals.

Neither company was available for immediate comment.

Bankers say the merger makes sense, given Mubadala's main profit-generating company, Dolphin Energy, is a logical fit to operate under IPIC's banner.

But bankers are still trying to work out what it could mean for the companies' bonds.

"I can see the curves begin to converge," said a syndicate banker. "But it doesn't change anything fundamental about the bonds for me."

It would be quite some convergence. Mubadala, rated Aa2/AA/AA, had May 2023s trading at a Z-spread of 173bp on Wednesday, according to Eikon, while IPIC, rated the same, had Aug 2023s at plus 428bp.

"The difference between the two is mainly driven by technicals," said the syndicate banker. "IPIC has issued a lot more than Mubadala."

A second banker in the Middle East said: "IPIC and Mubadala used to trade relatively close to each other. But with 1MDB, investors are looking differently at IPIC. Also Mubadala has done relatively better with investors and investments."

Another banker said he thought the merger would be seen positively by investors, suggesting that the convergence between the curves will head towards Mubadala's tighter trading levels.

Bankers agree there is unlikely to be a change of control clause triggered by the merger, as the Abu Dhabi government is the ultimate parent of both companies.

"On the face of it, there shouldn't be any forced liability management from this," said a UAE-based DCM banker.

This is the second jumbo-merger to be floated out of Abu Dhabi this month, after First Gulf Bank and National Bank of Abu Dhabi announced they were in the early stages of discussions.

"It's the oil price movements that have encouraged both of these, for sure," said a third banker in the UAE. "1MBD is probably the driving factor in the IPIC-Mubadala talks, but you shouldn't discount the effect of oil."

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