Looming FI debt mountain
Banks have a significant amount of loan and bond debt to refinance through 2011 and into 2012. Can it all be done? asks David French.
Particular quasi-sovereign and corporate names have had to face up to serious issues in meeting all their debt obligations in recent months. These problems, at the likes of Dubai World, Saad Group and Algosaibi Group, have caused many headaches for policymakers and the banks that lent them the money during the boom times.
The coming months have the potential to see the turn of banks behind the cue-ball as a lot of the money that they borrowed during that same surge of lending between 2006 and 2008 is now coming due. Billions of dollars-worth of financial institution (FI) loans and bonds are set to mature in 2011 and 2012.
However, the bond market has only shown appetite for new FI issuance from a limited number of institutions, while the FI loan market has seen only one deal done since late in 2008. Therefore, with this mountain of debt coming due, will the GCC region be hit with a new debt problem?
The extent of the problem is clear. The last glut of bond issuance from the GCC countries, prior to the credit crunch, was in 2006. Therefore, any five-year paper that was issued during this period will be due to mature in 2011. Banks with such maturities include Riyad Bank (US$500m due April 2011), Arab Banking Corporation (US$300m due July 2011) and Abu Dhabi Islamic Bank (ADIB) (US$800m due December 2011).
Of greater significance is the loan market, where the majority of FI borrowing by GCC banks has taken place. Five-year money taken out in 2006 and 2007 – this includes the likes of Kuwait Finance House (US$850m due March 2011), Union National Bank (US$1bn due November 2011) and Qatar National Bank (US$1.85bn due July 2012) – will mature through 2011 and into 2012.
However, there are also three-year facilities that were raised in 2008, when the GCC region was regarded as being immune to the troubles of the wider global economy, that are also due. These include National Bank of Fujairah (US$210m due June 2011) and Bank Muscat Al Ahli Al Omani (US$375m due July 2011).
Compounding the refinancing issue will also be the vast step-up in pricing that any bank will have to swallow. These facilities were raised when funding costs were among the cheapest ever seen in the region. National Bank of Oman paid just 27bp over Libor when it raised a US$325m five-year facility in August 2007. Not even top-rated Western European corporates could achieve such pricing levels if they came to the market today.
While there is a lot of money to be rolled over or paid back over the next 24 months, the good news is that each institution only has one or two facilities due in that time. More importantly, bankers say that banks are also on the ball and have begun to look at ways to meet the maturities.
So what are their options? Most, if not all, shops shouldn’t have too much problem in paying back these facilities from capital reserves. However, if they want to refinance the liabilities, then the loan and bond markets will be the routes which they will look to.
In terms of the bond market, the recent spate of issuance has seen a number of FIs tap the market successfully. Speaking around the end of Ramadan, bankers said there were about half a dozen banks that had lined up lead managers to undertake a DCM issue in the fourth quarter of the year.
Some of these have already taken place (Burgan Bank and Qatar Islamic Bank have completed dollar deals, while National Bank of Abu Dhabi has completed roadshows with euro accounts but is waiting for a decline in the euro/US dollar hedge before printing a euro-denominated bond), while ADIB was due to begin roadshowing in mid-October and Doha Bank has made no secret of wanting to do a Q4 deal.
Those that are looking to do a deal in the near-term will find that it is a good time to access the bond market. Any Qatari credit seems to be drawing huge ranks of investors willing to part with their money – the book for QIB’s US$750m sukuk issue in late September was US$6bn. Abu Dhabi credits are in the same boat, albeit to a slightly lesser extent, while the rarity value of Saudi bank paper means that there will be plenty of investor interest in any FI issue from the kingdom.
Meanwhile, because GCC bonds tend to carry a fixed rate of interest, rather than a floating rate like the majority do in Western Europe, today’s low interest rate environment means that borrowers can lock in, in historical terms, a very cheap rate if they choose to tap the market now.
However, the bond market won’t accommodate all-comers and many banks will find themselves in a position where a DCM issue is unviable. Also, the market will have finite appetite for FIG paper from the GCC and many GCC banks do not have credit ratings; an essential for a bond issue in today’s market.
Therefore, the option for the majority will be the loan market. However, the FI market has been almost non-existent since late-2008 – the only transaction was a US$150m one-year club deal for Bank of Sharjah – so it will require a major turnaround to meet the huge demand that will be for refinancing. So, will this happen in time?
The consensus among bankers is that it will, albeit slowly at first. They point out that, because of the large amounts of government support that have been in place through 2009 and into 2010 to shore up banking systems in the GCC, FIs have had no need to turn to the market to procure finance.
Such a scenario is understandable, as why would you borrow from the market at a high interest rate when you have authorities providing bountiful capital at very cheap, if not non-existent, rates? Therefore, it will only be as these financial supports are withdrawn that banks will need to return to the loan market for their funding needs.
Confidence about the financial stability of banks is returning. Many of the debt problems in the corporate sector have now been flagged, with any necessary provisioning scheduled to take place gradually over a period of time. With the fear subsiding, banks will begin to trust each other once more with their capital and this will allow a FI loan market to return.
This will not only be of benefit to the banks but also to the wider market. A functioning FI loan sector, with banks lending to banks, will help to get the flow of capital moving again. The current paralysis for many sectors of the corporate loan market stems from the fact that banks are hoarding their capital over fear of what could happen. But, once money starts to flow again, banks will be more comfortable in lending in general; and not just to other FIs.
A complete return for the FI loan market isn’t on the cards for the foreseeable future, with the first wave of lending set to be done solely on a club basis. With banks also concentrating on existing clients and wary of expanding their loan books – general loan growth in the region isn’t expected for some time yet – this coming wave of refinancings will be done, predominately, by the institutions that took part in the original deal.
A syndicated FI loan market will only come back much later and, even when it does, it will only be for a limited number of banks. These institutions will be the larger entities that have reputations beyond the region and that can attract a significant amount of foreign capital. These will also be, more often than not, the banks that will also have access to the bond market. Therefore, for their refinancings, they will be able to pick and choose which is the best route for them to go down and act accordingly.
So are we going to see a new debt problem in the GCC as this wave of maturities reaches us? The short answer is probably not. While options might be slightly constrained today, the reopening of the FI loan market will be a huge help in rolling over existing obligations and should meet the needs of the majority of institutions.
The larger entities in the region will be have the option of utilising the bond market or putting together a loan deal; either on a club or, later on, a syndicated basis. Even if the bond market does become crowded, it will still have the star quality to draw in investors’ capital; it just depends on whether they are happy paying a few basis points extra for guaranteeing access.
They will also have the ability to tap multiple currencies to navigate around any potential oversupply problems encountered by the dollar market – National Bank of Abu Dhabi has been a leading exponent of exploring issues in other currencies.
As for the rest, those that retain the confidence of their existing bank group should be able to take advantage of the returning FI loan market to complete a deal on a club basis. This will become easier as credit begins to flow again. However, these banks will have to be prepared to pay more than they did during the boom years for the privilege. The only issue will be for those that cannot get their existing banks to recommit or that are unwilling to pay the margins necessary to secure a new deal. Then, repaying the loan might be the only option left open to them.