Mubadala’s Debt Conversion

Ashby Monk

The news of the day seems to be Mubadala’s big loss for the first six months of 2010. However, in my view, the subtext of this announcement is much more interesting. Apparently, there has been an agreement to convert the debt held by the government into an equity stake in Mubadala; which could triple the firm’s capital base over night, as Mubadala owes the Abu Dhabi government over 40 billion dirhams. This conversion will do two things: It will give the government greater control over the operations of the fund and, more significantly, it will remove the short-term pressure of interest payments.

This actually reminds me of the conversion the China Investment Corporation did back in 2009:

“…due to heavy paper losses from two high-profile overseas investments made before the financial crisis, CIC has been postponing the interest payment to its State shareholder…CIC has reached a consensus with the Finance Ministry to treat the $200 billion as its asset rather than debt, and the firm will pay dividends to the State instead of interest.”

In both cases, the SWFs took losses that might have made their interest payments back to the government difficult. And, instead of leaving the SWFs to stew, the governments then agreed to take the pressure off by converting the debt to equity. It’s really quite interesting. And, when you think about it, the SWFs end up in a much stronger position than before, as removing the interest payments facilitates a long-term investment time horizon, which is a prerequisite for the success of any ‘strategic investor‘.

2 Responses to “Mubadala’s Debt Conversion”

  1. 1 Victoria Barbary September 24, 2010 at 12:50 am

    I think this is interesting, but I on further thought, I’m intrigued as to why the debt-equity conversion gives the government “more control” over Mubadala. It’s the sole shareholder anyway, and the Crown Prince is the Chairman, so I’m not sure quite how it can exercise “more control”. Is this really that the government is going to exercise more oversight of Mubadala’s operations given that they’ve effectively gifted the fund AED40 billion in a debt for equity swap? Effectively the government are taking the long view and assuming that in the future Mubadala is going to be worth more than the share price they’ve paid. (Probably perfectly plausibly). A question to ask is whether the government are going to ask for a dividend for their extra equity. If so, this is really an exercise in debt rebalancing, much like Mumtalakat’s bond issuance a couple of months ago.

    But what is interesting is that it’s only really the equity portfolio that’s taken a hit. Mubadala’s equity portfolio, however, doesn’t have the sole purpose of making money, its there to get Mubadala access to technology that it needs to undertake its mission of developing the Abu Dhabi economy in line with the Economic Vision. Moreover, during the past year, they’ve not really added to it, preferring to concentrate on the operations. So these “mark-to-market” losses will always be unrealised. So, on the whole, not a big disaster.

    The story is that the fund is making more money from operations. It’s total revenues increased from H1 2009 by 35%, driven by operations in hydrocarbons (one assumes Dolphin Energy’s operations) and Aircraft MRO (precisely what they want). Moreover, last year the results included one off revenues like “sale of land”, which have disappeared this year.

    On the whole, therefore, I think Mubadala’s in pretty good shape.

  2. 2 Ashby Monk September 29, 2010 at 10:54 pm

    Hi Vee. Yeah, you make a fair point on the “control” issue. I guess I was in the “typicallY, equity gives you more…” mindset. But I see your point. And I agree that Mubadala is in good shape. As well, it is looking more and more like a conglomerate than an investment company. Anyway, thanks for the comment. Lots to think about.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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