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Tuesday, 12 December 2017

Loan market holds firm

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The Middle East has been the loan market story of the year. So far only marginally affected by fall-out from the wider loan market liquidity squeeze, both the corporate and the financial institution market still enjoy ample liquidity. By David Cox.

And with Middle Eastern investors looking to deploy their capital abroad and leverage up their investments through borrowing – some price increase notwithstanding – the market shows few signs of slowing.

Sabic is the latest corporate to illustrate the depth of liquidity now available to Middle East borrowers with its US$6.655bn loan that supported its acquisition of GE Plastics. The loan was initially aimed at both banks and funds, but due to a collapse in the fund bid on the back of the US sub-prime crisis, the deal had to be taken up predominantly among Sabic's relationship banks, with just three funds joining.

With 48 lenders making up the syndicate, the facility attracted enough liquidity to allow Sabic to trim its simultaneous bond offering to US$1.55bn from US$2.77bn and increase the loan. The syndication result was all the more impressive as other emerging market borrowers such as Tata Steel have recently been forced to restructure similar acquisition facilities with shorter tenors and higher margins to attract enough lenders in the wake of the fund exit.

Sabic follows a line of Middle Eastern corporate entities that have come to the market this year, including quasi-sovereigns such as Dubai Holdings, Dubai International Capital and ADNOC, and private sector groups like Saad, Alana and RAK.

Volume figures from Thomson Financial show how quickly the market has grown. Excluding project financing, non-financial Middle East borrowers have raised nearly US$34bn in the syndicated loan market in the year to September, close to the US$35bn borrowed across the whole of 2006. Compare this with just four years ago in 2003, when the Middle Eastern corporate syndicated loan market totalled just US$3.6bn.

With booming commodity markets there is a significant amount of excess capital sloshing around the Middle East and this is leading many of the region's – often state-linked – corporates to deploy capital overseas through acquisitions. And as well as using their own capital, they are leveraging up their investments through debt. Sabic, for example, was able to fund the acquisition of GE Plastics off-balance sheet at an opening leverage of 7.5x. Meanwhile, Qatari investment fund Delta Two's on-going £10.6bn bid for UK supermarket J Sainsbury was initially backed by a £6bn debt package, though leverage market difficulties is likely to see this figure reduced.

"As petrodollars make their way back into local economies, Middle East corporates are growing at a phenomenal rate and have a significant amount of surplus cash to employ," said Raouf Jundi, head of origination, Middle East and Africa, at Bank of Tokyo-Mitsubishi UFJ. "And while Middle East corporates would previously fund acquisitions through equity, they are now using leverage."

DP World's £3.92bn acquisition of P&O in 2005 was one of the first high-profile examples of foreign expansion by Middle East corporates. Since then, Middle East sponsors have acquired a diverse range of assets including Northern Irish electricity utility Viridian, British engineer Doncasters and Finnish stone wool manufacturer Paroc.

But even as the sub-prime crisis knocks confidence in the wider corporate market, buoyed by persistently strong commodity prices the boom is so far showing few signs of abating. Despite palpable nervousness in the market, in the first week of September Dubai World launched a US$2.7bn one-year facility, ostensibly for general corporate purposes but assumed to fund the group's recently announced investments in MGM Grand and Barneys. In the same week, the Qatar Investment Authority, the state-owned group that is circling J Sainsbury and thought be eyeing Nasdaq's stake in the London Stock Exchange, launched a US$3bn facility.

Both launches demonstrate the resilience of the Middle East corporate market in the face of reduced global liquidity. However, at an initial margin of 85bp, Dubai World has opted to proceed with a higher margin than it could have achieved prior to July.

International focus

This outward looking focus from the region's corporates is creating significant interest in the Middle East from the international banking community, turning the region from something of a lending backwater to a core element of the wider Euroloan market.

And despite an expected pricing uptick in the wake of the global liquidity crisis, for the region's top state-linked corporates margins are still easily comparable with that on offer in the mature markets of Europe. For example, Mubadala, Abu Dhabi's investment vehicle, completed a three-year US$2bn self-arranged loan earlier this year paying a margin of just 17.5bp. And as a measure of liquidity in the region, the group raised in excess of US$4bn, even though it was initially looking just to refinance last year's US$500m loan.

For names such as Mubadala, the fall in pricing is entirely driven by international liquidity. As a stand-alone business, lending at pricing as low as 17.5bp does not make economic sense but as the syndicated credit line is the relationship key that opens the door to more lucrative business, lenders are now more than happy to oblige.

However, as many large Western European corporates are already aware, relationship-focused deals carry risks. With the fall-out from the bursting of the global credit bubble meaning the days when commercial banks would be happy to put up large tickets in the vague hope of jam tomorrow are gone; cheap loans must now be justified. And if a borrower does not have an established bank group, or if its ability to provide meaningful ancillary business is doubted, then the chances of a successful deal are much reduced.

Qatar Telecom (QTel) fell victim to such a trap when it launched a US$2bn three-year debut loan earlier this year, which found a poor reception in syndication. This was because, priced at just 22.5bp, the loan was considered too cheap for a debut borrower. Fortunately, Qtel was able to put the memory of that syndication behind it when it closed a US$2bn facility in August.

"At the top level, Middle East pricing is very disciplined and borrowers have to be mindful of this," said one senior banker in the region.

Learning from its previous experience for the second loan, Qtel chose to pay the more attractive margin of 65bp. And with the wider market in a very nervous mood, a strong state-linked company such as QTel offers a good lending proposition. Moreover, bankers said the group was likely to be a good customer going forward. Qatar has deregulated its telecoms market and incumbents faced with the cold winds of competition tend to try to insulate their business with expansion and investment.

The performance of all these credits shows that although the market for large corporates may encounter some mild upward pricing pressure, the strong positive momentum is set to carry on for the rest of the year.

Lending to large corporates is only one side of the equation. As well as major names, the Middle East is seeing an expansion further down the credit curve with a burgeoning market for smaller but still fast-growing corporates.

These are corporates that have typically listed on local exchanges and are now looking to move their funding sources beyond the traditional bilateral route. These deals are led by international banks with local banks providing support. Typical of this trend, though at the larger end of the deal quantum, Saad Group opened the market for Saudi private corporates this year with two highly successful deals.

In July, the group's Saad Transport and Trading Company subsidiary completed a debut US$2.75bn loan through MLAs BNP Paribas, Citi, Fortis and HSBC. That facility was well oversubscribed and increased from US$2.5bn. It paid an out-of-the-box 85bp and banks were invited to join on a US$150m ticket paying 55bp. This deal was followed in August by a US$2.815bn facility through the group's Saad Investment Company subsidiary, which also secured an oversubscription and was increased from US$2.5bn.

More typical size-wise was Allana International's US$400m loan signed in July through MLAs BNP Paribas, HSBC and WestLB. The facility raised US$535m in syndication but was not increased and included a three-year revolver paying 85bp over Libor.

As liquidity for borrowers further down the credit spectrum is provided by a mix of local and international banks, these deals tend to be more price-sensitive than those from the largest state-linked corporates. This is because, traditionally, for local bank lenders the rule of thumb was for a minimum margin of 100bp. And while this might still hold true to an extent, the fall in the cost of funding in the FI sector means it is no longer such a hard rule.

Because this market is still in its relative infancy, pricing does not always follow the pattern set by larger corporates and judging what is a market-clearing level is not always easy, particularly given that few of the smaller private borrowers have credit ratings.

"For the larger quasi-sovereign corporates, pricing is probably as low as it can go. But for the smaller corporate market, there are fewer pricing references and as a result margins tend to vary considerably," said Raof Jundi at Bank of Tokyo-Mitsubishi UFJ.

As the smaller company sector is supported by the local bank bid, which remains liquid and unaffected by the sub-prime woes of their international peers, it is unlikely to feel the type of pressure that might impact borrowers reliant on international liquidity. Whether this will affect larger companies in the Middle East was by early September unknown, and bankers were scrutinising early autumn launches for signs of pricing pressure.

Initial launches have given mixed messages. In the same week that Dubai World launched a one-year loan priced at a blended 97.5bp, the Qatar Investment Authority launched its facility at 25bp and Dubai Ports World launched a five-year loan at 45bp. The three launches led one banker to say: "The market is nervous at the moment and pricing is everywhere,” adding: “At the moment, the market lacks direction and the performance of all deals in the market will be closely scrutinised."

FI pricing pressure

The corporate market is only one side of lending to the Middle East and the region's FIs have been long-standing users of the syndicated loan market. Just as corporates have benefited, strong lender demand has seen virtually all of the region's top FI names tap the market this year.

Prior to the summer, benchmark pricing had settled at 25bp margins for banks in the lower to middle A rating range, such as ABC (BBB+/A3), Arab Bank (A–/A3) and GIB (A–/A2). But at the end of June, Qatar National Bank shattered this benchmark with a US$1.8bn loan priced at just 19.5bp.

As an Aa3/A+ bank with around a 50% market share in its domestic market, QNB could reasonably expect to have secured a discount to the region's other banks, but the scale of the reduction left many in the market shocked. While many felt that the deal was too tight, the strength of QNB's relationships saw the deal oversubscribed in the first round, leaving the loan in excellent shape for general syndication.

Given the success of the loan, which meant Middle Eastern FI pricing was now on a par with that of Western Europe, bankers expected the new margin would set the pricing tone for the rest of the year. However, with the FI sector entirely reliant on the international bid, wider market liquidity markets look set to push FI pricing higher.

Emirates Bank was the first major FI to come in the autumn and this has given a good indication of the state of the market. With international lenders now cautious and unwilling to take on new underwriting positions, the borrower opted to club its proposed US$1bn to US$1.5bn loan. Greeting the club move as highly sensible in the current market environment, bankers were also quick to praise Emirates' reasonable approach to pricing, with the five-year loan out to lenders in early September with a margin of 25bp and a 50bp fee.

Despite some talk that bidding would see the price slip below that of Qatar National Bank, Emirates Bank opted for pragmatism – taking the view that a successful deal was more important than squeezing the last basis point out of its banks. At this level, the bank had reverted to the pre-summer margin benchmark. However, at 50bp the fee suggests that pricing inflation is starting to feed through. For example, in syndication Arab Bank paid a top fee of just 25bp, which, even assuming the MLAs' skim was as high as 15bp, shows pricing signals are on the way up.

Still, the actual price increase is small at only a few basis points a year, showing that for the right borrower with good relationships and decent ancillary business on offer, the loan market is still offering exceptionally competitive funds. However, while large banks such as Emirates have significant side business on offer, the same is not true of smaller banks, which have also enjoyed cheaper and larger loans over the past year.

Indeed, with the wider market going from a state of excess liquidity to a credit squeeze, within the coming months the loan market could well be a less welcoming place for many borrowers without an established relationship bank group and borrowing track record.

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