The Crucial Role of Investment Banking

An interview with Arul Kandasamy, Head of Investment Banking, Abu Dhabi Commercial Bank 

Abu Dhabi Commercial Bank (ADCB) offers comprehensive investment banking capabilities to customers in UAE and the wider GCC, with substantial growth too in India where the bank has two branches. It is perhaps surprising, therefore, that its investment banking division is relatively new, yet still plays such a crucial role in the investment banking community in the region. In this interview, Helen Sanders, Editor, talks to Arul Kandasamy, head of investment banking, about the achievements of the bank, and its customers, so far, and his plans for the future.

Tell us a little about your background

I am Malaysian by nationality, and first went into banking in the UK in 2002, working for Credit Agricole in London. Initially, I was part of the securitisation team, and later became involved with asset-backed securities (ABS) when the ABS market was at its peak, which has given me very valuable experience later in my career. In 2004, at a time when interest in Islamic finance was growing, I moved to Bahrain to set up an Islamic banking product team. Again, this was a very interesting and valuable part of my career, playing a role in the shaping of this market. After two years, I moved to Dubai where I set up the Barclays Capital sukok (capital markets) business. During this time, we initiated the world’s largest sukok transactions, and achieved a number of ‘firsts’ including the first exchangeable sukok, the equivalent of an exchangeable bond.

In 2008, I was invited to join ADCB to set up its investment banking operation. In many respects, it was a difficult time to start a new bank, given the global financial crisis that was rocking the markets around the world, but UAE was a relatively safe haven during this period, and it was a remarkable experience to be involved right from the beginning in the development of a bank that has since demonstrated such significant value to corporates, governments and financial institutions in UAE and the wider GCC, both those headquartered in the region and foreign multinationals.

What characterised the early years of investment banking at ADCB?

For the first five years, we focused on three key pillars that were consistent with the needs of our customers at that time: structured debt financing, wider structured finance solutions, and syndicated loans and capital markets. For example, our structured debt finance services offered real estate financing and construction financing through to securitisation of leases post-construction. Wider structured finance solutions included acquisition financing, project financing include recourse, non-recourse and highly leveraged transactions. In the capital markets, we underwrote and book-ran corporate loans through to long-term project financing with syndicates of both regional and foreign banks.

How did ADCB differentiate its investment banking offering compared with foreign banks with a presence in UAE?

We had a strong balance sheet throughout the crisis, a period through which many banks struggled. We offered, and continue to offer, a unique skill set, attracting many of the world’s finest banking professionals who are based in UAE, offering a combination of product expertise, industry track record and regional and global insights from which our customers benefit enormously. The combination of financial strength with local and global expertise has often enabled us to undertake transactions that many other banks could not, such as real estate financing in UAE.

How have the bank’s investment banking activities evolved from its early financing roots?

Our investment banking operation has evolved dramatically, with new solutions and services, innovative technology, an expanding range of skills and expertise and a strongly customer-focused culture. These have in turn led to substantial growth in market share. For example, there was no appetite for equity capital and M&A during, and immediately following the crisis, but we are now seeing a significant growth of interest, which we support through our corporate finance function within investment banking. We are now frequently appointed as lead manager, and we offer a comprehensive corporate finance advisory service. In addition to the depth of our financing capabilities, customers are attracted to our on-the-ground product knowledge and service delivery. In contrast, many foreign investment banks have only coverage capabilities located in the region, with specialist knowledge located in other locations and time zones.[[[PAGE]]]

The growing appetite for equity capital is one important example of how customer needs have evolved. What other characteristics would you note?

Traditionally, our footprint extended primarily to customers in UAE but over the years this has expanded to Saudi Arabia, Kuwait, Oman and Qatar. In addition, we are now supporting customers in India with two ADCB branches now established. Around 40% of our customers are now located outside UAE.

In the years before the financial crisis, customers’ primary requirement was for financing. As market liquidity became more constrained, liquidity became a far more significant requirement, so customers were seeking to refinance debt with longer maturities with more favourable repayment profiles. In the years between 2009-2011, restructuring was often the primary requirement for organisations that were struggling to maintain debt repayments.

We have now entered a quite different phase in the economic cycle. Some organisations need to borrow to fund expansion plans, while others are refinancing, but restructuring has tapered off. In addition, there is a greater demand for deleveraging, with organisations paying down debt to avoid the liquidity constraints that characterised the global financial crisis.

How do you manage customers’ investment banking needs in practice?

Our wholesale banking division is divided between our coverage teams, who manage customer relationships, loans and deposits, and our specialist solution segments, such as transaction banking, investment banking etc. Our specialists in each of these divisions work closely with coverage to ensure that relationship managers have access to the right information and resources that they require to support customers’ requirements. For major customers with large-scale requirements, we also establish direct relationships on behalf of investment banking (as does transaction banking etc.) but in close co-operation with coverage. Customers frequently have complex requirements that require a multi-disciplinary approach. For example, to establish security over real estate, we engage the agency team; for cash flow-based financing, there may be a need for offshore accounts, so we work with the offshore teams. Similarly, customers that require cash flow waterfalls potentially need certain types of account and cash management services.

How do you see ADCB’s investment banking activities evolving in the future?

Corporate finance will continue to be a key strategic business for ADCB, which we are uniquely placed to combine with our well-established, highly respected structured finance capability. Many M&A transactions are funded through debt, so the combination of financing and advisory services is a valuable proposition for our customers. We are considering setting up an agency business so that we act as agent bank to liaise with borrowers, and collect cash to distribute to syndicate members.

As we expand the depth and geographic extent of our customer base, we will continue to invest in high-quality people who offer fresh thinking, skills and experience that will benefit our customers, together with innovative technology and solutions. Increasingly, we see that customers’ requirements will become more specific, leading to a growth in bespoke solutions. For example, a customer had a high value share portfolio in Saudi Arabia that they wanted to use as collateral against new debt. However, the shareholder agreement stated that shares needed to be held in an onshore entity, which would have prevented them being used as collateral for international borrowing. We needed to create and implement an offshore ownership arrangement to facilitate the customer’s need for financing whilst fulfilling local regulations for local shareholding. By successfully establishing this structure, the customer was able to conclude a $400m syndicated loan which would not have been feasible otherwise.

Looking back at my career at ADCB over the past six years, I have seen our investment bank flourishing from a processing centre into a crucial player in the investment banking community. Being a part of our customers’ success is personally very rewarding, and these successes have increasingly been recognised externally. For example, in 2013, ADCB investment banking received two Deal of the Year awards from the The Banker magazine, recognising innovation and commitment to fulfilling customer needs. This included the award for Middle East Restructuring for ADCB’s role in a successful $1.7bn restructuring at Global Investment House. The second, for Middle East Islamic Finance, highlights the strength of our capabilities in the Islamic capital markets with a $2bn refinancing for the Jebel Ali Free Zone. I look forward to ADCB, and our customers, going from strength to strength, and contributing to the sustainable prosperity of our customers and the wider society in which ADCB plays such a critical role, both in UAE and beyond.