Just out of reach

Financing availability for the GCC region is delicately poised as eurozone events begin to exert a wider toll, writes Kevin Godier.


Hit by the need to shore up their balance sheets, European banks – especially lenders from France – have been forced to re-evaluate the amount of capital they can deploy into foreign markets, such as the Gulf Cooperation Council (GCC) region, where overall lending levels have been curtailed in 2011. Data compiled by Bloomberg showed that syndicated loans into the Middle East had plunged 72% by mid-November, to US$17.6bn from US$62bn at the corresponding stage in 2010.

As a result, the region’s steady flow of multibillion-dollar deals will need multiple sources of finance, especially from banks based in the GCC and from export credit agencies that offer direct lending, such as those from Japan and Korea.

Market squeeze

“There is a squeeze everywhere – the GCC region is not isolated from the wider world,” underlines Bashar Al Natoor, director, corporate, at Fitch. “There is a lot of short-term and local currency liquidity, but not long-term, dollar liquidity. As always, the higher credit quality entities are getting the best access,” he adds.

“Many European banks are being forced to reduce their balance sheets as both a response to increased risk from the eurozone crisis and from regulatory requirements following the 2008 banking crisis,” explains Will Nagle, chief executive of Falcon, a boutique financial institution, which opened an Abu Dhabi office in December.

“This is obviously having an impact on the GCC region. We are finding an increased level of enquiries from both corporates and financial institutions (FIs) in the GCC region because they are being squeezed,” he says.

Because some of its European relationship banks have shut off lending, executives at the Dubai-based Emirates Airlines, for example, have said that they are turning
to the Islamic financing system, as well as to lenders in emerging markets to help pay for its new fleet of 243 aircraft, worth more than US$8bn, that has been ordered from Airbus, Boeing and other aerospace companies.

Looking ahead, analysts have predicted that another problem could emerge for Gulf companies need to refinance large amounts of maturing debt that they took out when market conditions were more benign. Moody’s Investors Service, for example, estimates that more than US$10bn of debt owed by state-owned companies will mature in Dubai next year.

And Standard & Poor’s (S&P) Ratings Services has indicated that bond issuers across the entire GCC zone face rising refinancing risks over the next three years because the amount of debt maturing in the region will increase significantly between 2012 and 2014.

“Industry experts estimate bonds and sukuks of about US$25bn will mature in 2012, rising to about US$35bn in 2014,” said the rating agency in a November 17 statement. “Standard & Poor’s believes the region is therefore entering a challenging loan and bond refinancing cycle, especially given the ongoing volatility in capital markets and fears that slowing global economic growth is already curbing corporate debt issuance and heightening refinancing risk in the region.”

Project finance

Project finance has typically been a strong area for French banks, but none were among the 31 lenders that took a hand in the over-subscribed US$3.34bn commercial loan for Qatar’s giant Barzan gas project, which was signed in mid-December.

Despite this absence, the overall US$7.2bn deal was “the biggest debt amount ever raised for a Qatar project – and was completed in challenging market conditions, given the eurozone crisis”, says a banking source close to the deal.

“Despite the absence of French banks due to the crisis, 25% of the lenders are based in Europe, while around 33% are from Asia, and another third are GCC-based,” the source adds.

“The lack of liquidity, increase of cost of funding and reduction of tenor available have forced some banks not to enter and even step down from some of the projects in the area,” notes Ivan Giacoppo, head of oil & gas, infrastructure & steel at Italy’s ECA Sace, which is involved in guaranteeing a portion of an overall US$2.55bn of ECA financing for Barzan. “But the strongest banks remain and new banks are entering in the export credit business in the region. The strongest projects recently launched in the market have been oversubscribed.”

Many market observers anticipate that ECAs – especially Sace’s counterparts in Asia – will continue to play a vital role in providing financing capacity for major GCC projects. The Dubai Electricity & Water Authority (Dewa), to take one example, has been courting support from Japanese and Korean ECAs to ask for their support in backing the 1,500 MW Hassyan independent power project.

“The continued volatility in the market is making long-term committed funding at a competitive price much more attractive. We have never been busier in terms of the appetite within the GCC for ECA finance,” says Piers Constable, Deutsche Bank’s Dubai-based head of coverage, Middle East and Africa, structured trade and export finance.

“There has been a new stream of requests over recent months, with a number of high-profile borrowers accessing the ECA market for the first time, or the first time in significant amounts, across a number of countries, mainly in the UAE and Saudi Arabia.”

Constable emphasises that massive tranches of direct lending are available to the region from the Japan Bank for International Cooperation (JBIC) and the Export-Import Bank of Korea (Kexim).

“JBIC and Kexim can offer the sort of lending that is required for the huge infrastructure deals here, anywhere in the range from US$1bn to US$3bn,” he highlights. Another banker underscores that “an anticipated US$10bn of the funds required for the UAE’s nuclear power programme is likely to come from ECAs, mainly from South Korea”.

Regional bank strength

With some international banks now less certain participants than before in GCC projects, one evolving paradigm will be a shift away from US dollar long-term lending into local currency lending provided by GCC-based banks, says Saad Ur-Rehman, Banque Saudi Fransi’s group general manager, head of structured finance division.

“Due to the rising cost of US dollar funding and restricted availability, it has become a norm for borrowers to source local currency funds to finance their projects. The ‘mismatching’ risk for power and infra-structure projects are minimal and hedges for FX risk, primarily during construction, are freely available. For oil, gas and petrochemical sector financing, the borrowers have become comfortable with the long-term exchange rate stability offered by the GCC currencies. Banks in Saudi and the UAE and other regional FIs are supporting projects in this way, and we believe that this trend will become more prominent in 2012, especially with copious liquidity in local currencies,” he says.

As an example, he cites a five-year SR10bn (US$2.67bn) loan for Mobily, the second largest GSM provider in Saudi, that closed in December. Most of the funds raised will go towards refinancing existing transactions.

“The Mobily deal received very strong interest from banks, and was oversubscribed three to four times,” says Ur-Rehman, adding that a series of smaller deals in Saudi riyal have also successfully been closed.

“No project or deal has stopped or been delayed in Saudi due to a lack of financing,” he highlights. “Commercial banks and Saudi funding institutions, which provide soft loans, have demonstrated very strong appetite and backing for private projects, and have been able to cover large projects very successfully.”

Further evidence of this trend, observes Ur-Rehman, came with the December 9 financial close for a US$2.071bn debt financing backing the 3,927MW, US$2.79bn Qurayyah independent power project on the east coast of Saudi Arabia. The developer, Acwa Power, has indicated that some 60% of the funding came from local banks and 30% from ECAs.

While regional banks in general have experienced improvements in their liquidity and loans to deposit ratios, it is as always, their top-tier customers that stand to benefit most. “Local bank liquidity is still strong, but there is a differentiation between the key names that always get support and the potential borrowers on the lower credit rungs,” says another banker.

Capital markets

Bond markets generally remain less accessible than local bank and ECAs funding, as shown by the mid-November S&P observation that just one of all the GCC-based corporates that it rates – the Abu Dhabi government-backed International Petroleum Investment Company (IPIC) – has tapped the capital markets over the past six months.

S&P stressed that several GCC companies “have delayed issuances, which we believe could accentuate refinancing risks for these players”, adding that certain entities are “perhaps hoping for better pricing conditions at a later date”. On the project and infrastructure side, the agency said that financing needs “remain sizable, particularly in the power and water sectors”.

understands that Barzan’s sponsors – Qatar Petroleum (QP) and ExxonMobil – will almost certainly be seeking a bond for refinancing purposes.

“The bond documents are set up and the rating process is complete – a bond will follow when the market conditions are right. Qatar’s RasGas achieved commitments of over US$17bn with its US$2.23bn bond in 2009, so it is probably a question of choosing the right moment,” says the project source.

The picture regarding bond issuance by banks in the GCC is quite positive, according to Mahin Dissanayake, director, FI, at Fitch. “On the banks’ side, there has been a sharp increase in issuance in the fourth quarter, due to the demand for good emerging markets risk.

Banks in Qatar and Abu Dhabi have ratings advantages and should issue successfully despite quite adverse global conditions,” he notes.

On the sukuk (Islamic bond) side, “regional Islamic banks are highly liquid, and there is a lack of Islamic bond assets”, Dissanayake adds.

“On the back of this pent-up demand, HSBC Middle East issued an Islamic bond in the first half of the year, and was then followed by Sharjah Islamic Bank, First Gulf Bank, Abu Dhabi Islamic Bank and Abu Dhabi Commercial Bank. We expect several more banks to issue in Q1 2012, either because they have significant refinancing needs, or are trying to offset funding and liquidity challenges,” he says.

Banque Saudi Fransi’s Ur-Rehman also sees the sukuk market as an important source of liquidity. “Everybody has seen its success, whereby around 60% of the subscription to the last two or three Middle East issues has come from regional institutions.”

On the debt side, an Islamic financing tranche worth US$850mn was included as part of the Barzan financing, marking “the largest ever Islamic tranche in QP’s financing history”, says QP’s finance director Abdulrahman Al-Shaibi.

Pricing hikes

However, both corporate and FI issuers will be paying higher pricing on their bonds, believes Fitch’s Dissanayake. Even the Qatari government – universally regarded as the region’s best credit – is paying more, as evidenced by its US$5bn bond issue in November, on which the longest five-year tranche was priced at 225 basis points over US Treasuries. Qatar’s previously issued five-year bond maturing in 2015 is trading at 135 basis points over.

There has also been an impact on funding costs for ECA-backed debt, says Deutsche Bank’s Constable. “Compared to six to 12 months ago, borrowers are seeing that appropriate pricing must be paid to get deals done successfully, given that banks generally are under constraints, albeit some more than others. We are managing borrowers’ expectations quite openly, and being consistent in our message,” he notes.

A big test could come in 2012, when the massive petrochemicals project planned in Jubail by Saudi Aramco and Dow, formerly known as the Ras Tanura Integrated Project, and now called the Sadara Chemical Company, comes to market. Nine ECAs have already received an information package, and two Korean agencies – Kexim and K-Sure – will be among the ECA group, says another banking source, citing several “very low Korean bids for contracts”.

The source adds it is likely that ECAs from Japan, North America, France and Germany – as well as Saudi Arabia’s Public Investment Fund – will be backing a financing package which is likely to cover between 60% and 70% of capital costs, cited at well over US$15bn.

How well the financing process fares will of course depend greatly on the extent to which the GCC region remains insulated from European financial troubles.
“We had our problems in 2008 with Dubai but have emerged from that,” says Ur-Rehman.

“The situation in the Gulf should stay the same or even improve, unless there is a global-scale disaster in Europe, from which there would be no shield,” he concludes. GTR