Corporate finance boom
High oil prices have turned the Middle East into one of the most vibrant markets in EMEA. Local and foreign banks alike are active in the region, corporate borrowers have joined the more traditional project and FI borrowers and Islamic finance is on the rise. Victoria Pennington reports.
The Middle East remains a buoyant market, with oil money still flooding the region with liquidity. The staple flow of project finance deals has continued this year but it has been the boom in corporate issuance that really has the market buzzing.
In 12 months to August 2006, there were 74 loans issued worth US$67bn, compared with 86 deals worth US$52bn the year earlier, according to data from Thomson Financial.
“The growth of investment banking in the region is a sign of what is happening in the region. There has been a continued increase in access to corporate finance, equities, fund management and capital markets activity,” said John McWall, head of syndications at Arab Banking Corporation. “The impact of this is the explosion in capital market growth and many private companies are choosing to become public and become more acquisitive, which ultimately leads into the debt market.”
Volumes have been boosted by several large corporate transactions as well as the usual raft of project finance deals, while the fall off in the number of issuances is perhaps reflective of the larger deals that are coming to market and the loss of FI borrowers over the past year.
“Project finance is a traditionally stable part of the Middle East market but the real significant growth has been in the corporate market over the past two years,” said McWall. “The main driver of growth is coming from the UAE, with major corporates looking to expand overseas.”
In March, DP World launched the region's largest corporate acquisition loan to back its takeover of P&O. The US$6.5bn five-year loan scored a huge oversubscription and the margin was flexed down by 25bp to 100bp over Libor as a result.
Reverse flex is common on leveraged loans but is extremely rare on investment-grade names, although the borrower also flexed down the US$1.45bn loan backing its acquisition of CSX Corp's international business signed in February last year, but in that case the general consensus was that the deal was overpriced. For the latest deal, due to its size, MLAs Barclays and Deutsche Bank had to be careful when pricing the deal to ensure liquidity from both international and regional lenders, which rarely look at anything priced below 100bp over Libor. The market rightly judged the loan to be well-priced quasi-sovereign risk and subsequently piled in, prompting the reverse flex.
Several corporate deals came after the DP World transaction, beginning with Qatar Petroleum’s US$550m five-year club loan in May. The state-owned, Single A rated company sought and won ultra-aggressive pricing for its debut US$550m loan of just 17.5bp over Libor, a 5bp commitment fee and a paltry 7bp upfront fee to banks that joined the club. The promise of lucrative ancillary business attracted investors into the deal despite the low margin.
Another state-owned group, ADNOC, is preparing to launch its US$4.5bn five-year loan, which at 19bp over Libor, is paying a slight premium to Qatar Petroleum.
Telecoms have made a return to the loan market in 2006 and no more so than in the Middle East. In June, UAE telecom Etisalat’s US$3bn deal was joined by transactions from Dubai Holding and Kuwait's Mobile Telecommunications Company (MTC).
As a majority state-owned telecom, Etisalat secured a margin of 22bp over Libor (stepping up to 25bp over Libor if extended) on its US$3bn one-day loan with upfront fees of between 7bp and 12bp. Even for a state-backed company, this was quite tight and investors were initially slow to commit. Nevertheless, the deal closed with a slight oversubscription.
Dubai Holding’s US$2.25bn 18-month loan backing its purchase of a 35% stake in Tunisie Telecom through MLAs are Emirates Bank and Standard Chartered, paid 70bp over Libor with a top ticket of US$100m for 30bp upfront. But it is MTC’s deal that has had the biggest impact on the market.
MTC's hard lessons
MTC's US$4bn revolver launched on June 3 through MLAs BNP Paribas, Calyon, Credit Suisse and UBS. The five-year facility paid 85bp over Libor, ratcheting along a leverage grid. Senior lenders were offered US$200m for 50bp upfront.
The deal took a long time to attract investors and it eventually signed in late July with a syndicate of more than 40 banks. The large syndicate suggests a desire among lenders to limit exposure to the region as there was a general unwillingness to commit to the larger tickets. Regional banks also do not like to fund into such large deals at below a 100bp over Libor headline margin.
The difficulty in completing the deal has led some bankers to question the capacity for jumbo transactions in the Middle East. “The capacity of the market for multibillion dollar loans to non-hydrocarbon businesses is constrained, not least by the one-obligor limits of the local banks,” said Simon Jackson, deputy general manager, loan syndications, at SMBCE. “The recent acquisition facility for MTC illustrates this. Had it been launched at US$3bn with the same syndication strategy, it would have been oversubscribed and justifiably hailed as a triumph. Having been launched at US$4bn, the MLAs appear not to have achieved their selldown targets, as evidenced by the secondary market bids.”
That said, investment banks often sell down all of their debt in the secondary market and that paper may have flooded the market leading to an early fall-off in the trading of MTC paper. The market has absorbed and oversubscribed virtually every facility for the previous three years and the difficulty in getting MTC done might be symptomatic of a shift in the business cycle. “In a liquid market with falling pricing, competing bidders price primarily on the basis of where they believe their opposition will bid, taking the appetite of retail investors for granted. As deals begin to stick, the investors once again drive the market,” said Jackson.
There is a general consensus that the market is beginning to feel the pressure of its own success, with pricing bottoming out in most sectors and financial institutions opting out of the loan market and looking more to the capital markets to raise funds. However, similar phases in previous cycles have demonstrated MLAs' reluctance to propose, and borrowers' reluctance to accept, higher pricing. It is more likely that investors' demands for an increase in yields will not impact liquidity greatly and an external event will be required to trigger any meaningful increase in margins.
For the immediate future however there is a healthy pipeline of corporate deals. Amaar Properties, the Dubai-based real estate and construction group, is out with its US$1bn debut loan to senior lenders, through bookrunner Citigroup. The five-year loan pays 60bp over Libor. Investors have been asked to commit US$150m with a US$100m target final hold. With a market capitalisation of US$22bn and revenues of US$2.3bn in 2005, Amaar Properties is the world's largest real estate company.
Islamic finance issuance has been steady this year with Kuwaiti investment house AREF out with a US$100m three-year revolving murabaha, through joint MLAs and underwriters ABC Islamic Bank and Standard Chartered. The facility pays 150bp over Libor. Etihad Airways US$400m Islamic lease facility is progressing well, through ADCB and Citigroup. The 12-year deal, which pays 67.5bp over Libor, funds the borrower's purchase of four A340-500s.
Most Islamic finance tends to be found in the smaller tranches of project finance debt and mostly in Saudi Arabia at that. Deutsche Bank arranged a US$1bn murabaha for petrochemical giant SABIC, while Yansab’s US$5bn 12-year project deal includes an Islamic piece priced around the 65bp over Libor level. The US$1.5bn Rabigh project also included a US$500m Islamic tranche, which has a similar pricing structure to the project's commercial tranche.
Islamic tranches first appeared in major project finance deals at the behest of the borrower, which shared a moral obligation to include an Islamic portion of debt. Some in the market argue that it is only this political and moral obligation that is driving Islamic finance and that, although this can begin the process, it cannot form the basis of an Islamic finance market. Nonetheless, international banks have been quick to form their own Islamic finance divisions and can now offer Shariah-compliant debt and at a significantly lower margins than regional banks. A margin of 100bp is very much the make-or-break point for regional Islamic banks and with more and more deals closing below the 80bp level they are unable to participate on the larger deals. Bankers believe that volumes for 2006 for Islamic deals will remain around the US$10bn level.