Middle East Loans Roundtable Part two

Once a relatively sleepy backwater of longer-term project and small-scale FI financings, the loan markets of the Middle East are now global and booming. But as hydrocarbon-fuelled corporates and sovereigns seek to diversify and pick up assets around the world using leverage, the global credit market is facing its severest liquidity test since the early 1990s. Some say the malaise is even more profound than during the last oil shock.Despite the very real difficulty in some parts of the loan market, the first IFR Middle East Roundtable’s panel was unanimous in the belief that, for the right name, there is still plenty of liquidity on offer. With a couple of notable exceptions, Middle East banks look to have escaped relatively unscathed from the subprime crisis. However, given the market’s reliance on international banks, increased bank funding costs mean liquidity now carries a higher price.Borrower flexibility is also key. With economic growth feeding inflation, fears that Gulf economies will depeg their currencies from the dollar have led to a local shortage of greenbacks. This means that as well as being innovative in terms of where they source liquidity, successful borrowers are those that are flexible on both price and currency.The dollar shortfall means that local currency tranches are probably here to stay for the foreseeable future. Borrowers have to take liquidity where they can find it. A local tranche that makes up 10 or 20 percent of a total deal size can mean the difference between success and failure.This search for liquidity has increased the profile and importance of Shariah-compliant facilities. Further, the higher pricing of the current tight market is tempting back Islamic funds that were squeezed out over the past few years as international banks, with lower costs of funding, moved in.Those who lend money, of course, also expect to see it paid back and the rapid maturing of the loan market has been supported by the emergence of a liquid bond space. Strained lender balance sheets mean this market is going to be vital in keeping credit flowing in region. Simply put, banks are no longer in a position to provide large long-term financing. The size of the financing ask from the region - specifically from Dubai Inc. related entities – means that lenders need to see loans taken out swiftly through the capital market.Such lending constraints also apply to the infrastructure market – long a mainstay of the region’s loan markets and a vital sector as Gulf economies invest in their future economic stability. The problem for project finance is that three-year corporate margins now stretch well into the 100bps, which makes lending to projects over 10 or 20 years relatively unattractive. Recognising this issue, the panel said that while structures such as mini perm may return to the bank market, alternative investors and the capital markets are going to be increasingly important for infrastructure funding.Click here for Participants

Despite the very real difficulty in some parts of the loan market, the first IFR Middle East Roundtable's panel were unanimous in the belief that, for the right name, there is still plenty of liquidity on offer. With a couple of notable exceptions, Middle East banks look to have escaped relatively unscathed from the subprime crisis. However, given the market's reliance on international banks, increased bank funding costs mean liquidity now carries a higher priceBorrower flexibility is also key. With economic growth feeding inflation, fears that Gulf economies will depeg their currencies from the dollar have led to a local shortage of greenbacks. This means that as well as being innovative in terms of where they source liquidity, successful borrowers are those that are flexible on both price and currency.The dollar shortfall means that local currency tranches are probably here to stay for the foreseeable future. Borrowers have to take liquidity where they can find it. A local tranche that makes up 10 or 20 percent of a total deal size can mean the difference between success and failure.This search for liquidity has increased the profile and importance of Shariah-compliant facilities. Further, the higher pricing of the current tight market is tempting back Islamic funds that were squeezed out over the past few years as international banks, with lower costs of funding, moved in.Those who lend money, of course, also expect to see it paid back and the rapid maturing of the loan market has been supported by the emergence of a liquid bond space. Strained lender balance sheets mean this market is going to be vital in keeping credit flowing in region. Simply put, banks are no longer in a position to provide large long-term financing. The size of the financing ask from the region - specifically from Dubai Inc. related entities - means that lenders need to see loans taken out swiftly through the capital market.Such lending constraints also apply to the infrastructure market - long a mainstay of the region's loan markets and a vital sector as Gulf economies invest in their future economic stability. The problem for project finance is that three-year corporate margins now stretch well into the 100bps, which makes lending to projects over 10 or 20 years relatively unattractive. Recognising this issue, the panel said that while structures such as mini perm may return to the bank market, alternative investors and the capital markets are going to be increasingly important for infrastructure funding.

Raouf Jundi, Bank of Tokyo-Mitsubishi: Driven by the growth of regional economies, the loan market in the Middle East is booming. There is strong liquidity but obviously at a different price, and coming perhaps from different areas. Europeans are still providing the bulk of the liquidity and the regional banks are happy to come in only if there is a local tranche. Occasionally local banks will lend in dollars, but clearly the cost of dollar funds for them is too high, but for local currency - dirham or Saudi riyal, etc - they can accept lower returns which are comparable to what the dollar returns are for European Banks.Grainne Molloy, HSBC: There is significant liquidity for the right Middle Eastern names at the right price. Middle East banks themselves have been relatively unscathed by the subprime crisis, with a couple of exceptions, but the debt market has not been immune from the fallout of that crisis. Increasing funding costs of banks, combined with difficulty in accessing liquidity, has led to greater selectivity amongst the banks which in turn has translated into increased costs for borrowers. From a currency perspective, borrowers have to be more flexible. Certainly there is dollar liquidity as we've demonstrated on a number of transactions – notably with Borse Dubai and its acquisition of OMX. That deal totaled roughly US$5.8 bn and was highly successful, securing an oversubscription in syndication which managed to tap various sources of liquidity. European banks have contributed substantially to liquidity in general and, on that transaction, roughly 40% came from European banks. Interestingly, roughly 40% also came from Asian banks who are playing an increasing role in the Middle East. Similar to other banks, however, Asian banks are also beginning to refocus on their own markets, and are therefore becoming more selective as their return requirements have increased. Raouf Jundi: Tenor is important for Asian banks as well. Clearly they prefer the shorter end plus the higher yield.Gilles Franck, Standard Chartered: Selectivity has become extremely important. Banks now look a lot more thoroughly into what is the value proposition. Pricing now needs to stack up to reasonable levels and ancillary business on offer has to be clearly defined, probably more so than in the past when there were promises on business that may or may not materialise. Credit committees now ask clearly what is the wallet or the shared wallet that borrowers can offer.Rizwan Shaikh, Citi: While lenders are being selective on the basis of relationship and cross-sell opportunities, they are becoming relatively less credit sensitive. Arguably, the liquidity component in pricing has become more important than the credit component. This is especially true for the regional banks and is particularly relevant in sectors where banks have concentration issues, such as real estate. Peter Bulbrook, Barclays Capital: This is true but the incredible volume of loan business that was transacted in the Middle East last year only 25 percent was actually placed with Gulf-based banks. Now, they are driving this price dynamic which seeks a return beyond their increased cost of funding, which is now on average north of 125bp or sometimes north of 150bp. So given the limited capital that have today they are clearly chasing yield. You can show them probably a whole series of different credits and different credit qualities, but price works for them, so if you have a premium price deal they will look at it pretty positively.Declan McGrath, RBS: Sectoral issues are also important and there is different behaviour patterns within different sectors. There is a clear differential operating between the banks that are true relationship banks, be they local or non-local, versus banks that are chasing yield. A lot more banks are less focused on being relationship banks of major clients, primarily because they know that they are not going to get fed and so they are chasing yield. Ce

Peter Bulbrook - Barclays Capital Peter Bulbrook is a Managing Director in Global Loans at Barclays Capital and is Head of European and Middle East Loan Origination. He joined Barclays Capital in 2000 from HSBC where he was a senior member of the Loan Distribution team.  Before that, Peter spent five years at the Industrial Bank of Japan where he held various roles in Structured Finance including Leveraged and Project Finance Loan Syndication. Gilles Franck - Standard Chartered Bank Gilles Franck is the Regional Head of Capital Markets, MENA and Pakistan for Standard Chartered Bank. Based in Dubai, he manages the fixed income, loan syndications and securitisation business across North Africa, Middle East and Pakistan. Prior to joining Standard Chartered Bank in June 2007, Gilles Franck spent 18 years at the former Paribas and then BNP Paribas where he was Head of Debt Capital Markets for the EEMEA region, based in London. Raouf Jundi - Bank of Tokyo-Mitsubishi UFJ (BTMU) Raouf Jundi has 22 years banking experience of which 20 years have been in the syndicated loan market. In particular he has covered the Middle East region since starting with BTMU 14 years ago. Raouf is responsible for the bank’s syndicated loan business in the  Middle  East and Africa regions, which has included corporate, bank, project and  sovereign borrowers. Previously he was with Bank of New York in London and Geneva. Declan McGrath - Royal Bank of Scotland (RBS) Declan is currently Managing Director and Head of Loan Capital Markets within the Royal Bank of Scotland Loan Markets Team. He joined NatWest Markets in July 1991 to run the Loan Syndications Distribution Group, having spent the previous 12 years at Credit Suisse First Boston working in the Bond and Syndicated Loan markets, both in the United States and in London. Grainne Molloy - HSBC Grainne Molloy is a Director in the Leveraged and Acquisition Finance team.  She joined HSBC in 1999. Prior to joining the syndicated finance team in HSBC, Grainne worked in loan syndications in The Industrial Bank of Japan Ltd (now Mizuho Financial Group) where she was responsible for syndicating international debt financings, primarily responsible for project financings. Rizwan Shaikh - Citi Rizwan Shaikh is a Director in CEEMEA Debt Markets at Citi in London. He has more than 10 years experience in credit, structuring and distribution of various loan products in emerging markets. He is currently responsible for the CIS and Middle East regions for syndicated debt and has led some of the largest financings across the region. David Cox - Associate Editor, IFR Ouida Taaffe - Senior Reporter, IFR   Click here for Part One of the Roundtable.

Raouf Jundi, Bank of Tokyo-Mitsubishi: Driven by the growth of regional economies, the loan market in the Middle East is booming. There is strong liquidity but obviously at a different price, and coming perhaps from different areas. Europeans are still providing the bulk of the liquidity and the regional banks are happy to come in only if there is a local tranche. Occasionally local banks will lend in dollars, but clearly the cost of dollar funds for them is too high, but for local currency - dirham or Saudi riyal, etc - they can accept lower returns which are comparable to what the dollar returns are for European Banks. Grainne Molloy, HSBC: There is significant liquidity for the right Middle Eastern names at the right price. Middle East banks themselves have been relatively unscathed by the subprime crisis, with a couple of exceptions, but the debt market has not been immune from the fallout of that crisis. Increasing funding costs of banks, combined with difficulty in accessing liquidity, has led to greater selectivity amongst the banks which in turn has translated into increased costs for borrowers. From a currency perspective, borrowers have to be more flexible. Certainly there is dollar liquidity as we've demonstrated on a number of transactions – notably with Borse Dubai and its acquisition of OMX. That deal totaled roughly US$5.8 bn and was highly successful, securing an oversubscription in syndication which managed to tap various sources of liquidity. European banks have contributed substantially to liquidity in general and, on that transaction, roughly 40% came from European banks. Interestingly, roughly 40% also came from Asian banks who are playing an increasing role in the Middle East. Similar to other banks, however, Asian banks are also beginning to refocus on their own markets, and are therefore becoming more selective as their return requirements have increased. Raouf Jundi: Tenor is important for Asian banks as well. Clearly they prefer the shorter end plus the higher yield. Gilles Franck, Standard Chartered: Selectivity has become extremely important. Banks now look a lot more thoroughly into what is the value proposition. Pricing now needs to stack up to reasonable levels and ancillary business on offer has to be clearly defined, probably more so than in the past when there were promises on business that may or may not materialise. Credit committees now ask clearly what is the wallet or the shared wallet that borrowers can offer. Rizwan Shaikh, Citi: While lenders are being selective on the basis of relationship and cross-sell opportunities, they are becoming relatively less credit sensitive. Arguably, the liquidity component in pricing has become more important than the credit component. This is especially true for the regional banks and is particularly relevant in sectors where banks have concentration issues, such as real estate. Peter Bulbrook, Barclays Capital: This is true but the incredible volume of loan business that was transacted in the Middle East last year only 25 percent was actually placed with Gulf-based banks. Now, they are driving this price dynamic which seeks a return beyond their increased cost of funding, which is now on average north of 125bp or sometimes north of 150bp. So given the limited capital that have today they are clearly chasing yield. You can show them probably a whole series of different credits and different credit qualities, but price works for them, so if you have a premium price deal they will look at it pretty positively. Declan McGrath, RBS: Sectoral issues are also important and there is different behaviour patterns within different sectors. There is a clear differential operating between the banks that are true relationship banks, be they local or non-local, versus banks that are chasing yield. A lot more banks are less focused on being relationship banks of major clients, primarily because they know that they are not going to get fed and so they are chasing yield

Raouf Jundi: There are two things. One argument is that the Russian FI market has remained open, so why is the Middle Eastern not there? Credit quality, in fact, in the Middle East is much better. But many of the banks had already been to market, so maybe the demand wasn't really there and as long as prices have gone up, the borrowers weren't willing to pay up.Now we are seeing a few banks going back into the market. There have been some club deals, there is now the first, test for Bank Muscat in Oman, where the banks clubbed it, signed the deal, advanced the funds and have now followed up with syndication to see what the interest is from the market.That will be a good test, because pricing has clearly gone up, the borrower has accepted it, we are seeing some interest, but the question is how much interest will there be. Declan McGrath: A lot of FI funding has been done. Whether the FIs got the timing right by accident or design is another question. But a lot of the FIs got their timing right. For example, QNB signed a loan last year at LIBOR plus 19.5bps. However, in six or twelve months' time, when they need to come back to the market, you might see a little bit of resistance. But you will find that they will get done on a club basis. They will try to get the crew of banks in that they want to get in there and then try and see what they can raise in general syndication. Bank Muscat will be a great example to see how this tactic actually pans out when it gets out to the marketplace.Gilles Franck: The FIs face the same constraints as corporates when it comes to considering the alternatives, which are the bond markets where the pricing has ballooned out as well, meaning there's little arbitrage between the markets.Peter Bulbrook: The borrowing was very opportunistic last year and US$20bn or so was raised. But everybody that participated or had the relationship expected the next course of financing access to be the capital markets. However, that market is not there right now, not at the price they want to issue at.The dynamic on these deals that have been clubbed so far is interesting and probably underlies why we have not seen increased debt capital market requirement. They are very focused on their benchmark spread, as would be any financial institution, but they have been willing to supplement the all-in requirement for funding, or all-in for lending, by some significant fee packages. Benchmark spread is probably the most sensitive issue for any FI issuer, so that has been a feature in clubbing these situations today.Rizwan Shaikh: Raouf mentioned that Russia is seeing more issuance in the FI space relative to Middle East. A big factor driving this is that most of the pre-crisis issuance by Middle East FIs was three or five years. Russia, on the other hand, saw mostly shorter dated deals. So a lot of the Russian FIs need to come back to refinance the maturing deals and are having to pay out more. While the margins on some of these loans have been kept artificially low by paying higher fees, the all-in cost has gone up significantly for most financial institutions.Declan McGrath: The size of the transaction is also key and you are unlikely to see US$2.5bn to US$3bn financial institution loans as new deals will be kept at lower levels.IFR: How much relationship pull does an FI have?Grainne Molloy: I think it comes down to price. Some of the FI lenders we speak to say, "We are not going to support our competitor at that price". Rizwan Shaikh: The relationship groups for FIs differ from corporates in the sense that you have a wide group of correspondent banking relationships spread out thinly, which can be leveraged to get small tickets. Corporate bank groups tend to be smaller but they are able to concentrate their relationship in terms of cross-sell and therefore can extract bigger tickets. So invariably in corporate deals, you tend to find smaller syndicates compared to FI deals.Grainne Molloy: Having a good rating helps with

Peter Bulbrook: To a degree, but not entirely and there is not an exact measure between loan and capital market pricing anyway. Raouf Jundi: It doesn't just apply to the Middle East and even Europe, where the banks - or the markets - have been saying that they will converge. They have never really converged. At one time either one is high or the other is high depending on where the liquidity is coming from. Rizwan Shaikh: Convergence will depend on size. If you can get deals done within your relationship group, you can be significantly inside the capital market pricing. The moment you need to go outside your core group, you will see a lot more convergence between loan and bond pricing. Peter Bulbrook: Across any loan market across the globe the relationship is the key to achieving subscribed deals and accessing capital from banks. I think it's a point that in the GCC we are in the infancy, in terms of loan market issuance and relationship development, particularly with the international banks. Clients have been issuing in a corporate context over the last two or three years in size but not previous to that. Clients have to be aware, and we see many that are, that successful deals come where clients have embraced their relationship banks, given them the right additional ancillary business and given the right income flows that support capital commitment. Grainne Molloy: In the past, we have seen deals which although aggressively priced and structured, were successfully placed in the market on the strength of relationship. But as deals are increasing in size, due to Middle East corporates becoming more acquisitive and reflecting the growth of the GCC economies, there isn't sufficient ancillary business to go around. So while relationship continues to be a key element in the successful distribution of deals, price and structure are equally important; it's not just the one without the other. Declan McGrath: The GCC is an evolving market, and borrowers are learning. There is an educational process that needs to go on both sides of the table and they have learned. Even the local GCC banks themselves, they are not hiring ex-pats from the foreign banks for no reason, they are doing it for all the right reasons and they are putting them in senior positions within those banks for all the right reasons. IFR: Why has there not been a sort of feeding frenzy in the Middle East as there has been in Russia? Why does the Middle East look relatively quiet compared with Russia? Rizwan Shaikh: It is really M&A driven. We've seen a drop off in both inbound and outbound M&A activity in the Middle East in the last six months, whereas there has been a lot of M&A activity in Russia which has driven volumes. Grainne Molloy: A percentage of it is project finance related. We've seen a slow down in the growth of project financing in the region and that's not because the projects aren't there but rather, contractors and sponsors have reached the natural limit of their capacity. There is a huge volume of project financing to come, but if you look at the volume of project financing as a percentage of total financing, it has actually declined. Traditionally in the Middle East market, project financing was around 70 percent of lending activity. In the last year or two, project finance has accounted for 20 or 30 percent of total lending volume. Peter Bulbrook: We also haven't seen significant FI issuance this year and we had about $20bn last year. A lot of the M&A either has been talked about but hasn't quite worked, or hasn't happened. There are some deals that have been delayed or have or have taken longer than expected. Declan McGrath: I think world M&A has also decreased, partly driven by two sides of the table. The target client that somebody may be chasing, because the equity markets have taken a hammering, they may decide they are not prepared to sell at the price that's being offered. Raouf Jundi: Also if you compare with Russia, the

Raouf Jundi: There are two things. One argument is that the Russian FI market has remained open, so why is the Middle Eastern not there? Credit quality, in fact, in the Middle East is much better. But many of the banks had already been to market, so maybe the demand wasn't really there and as long as prices have gone up, the borrowers weren't willing to pay up. Now we are seeing a few banks going back into the market. There have been some club deals, there is now the first, test for Bank Muscat in Oman, where the banks clubbed it, signed the deal, advanced the funds and have now followed up with syndication to see what the interest is from the market. That will be a good test, because pricing has clearly gone up, the borrower has accepted it, we are seeing some interest, but the question is how much interest will there be. Declan McGrath: A lot of FI funding has been done. Whether the FIs got the timing right by accident or design is another question. But a lot of the FIs got their timing right. For example, QNB signed a loan last year at LIBOR plus 19.5bps. However, in six or twelve months' time, when they need to come back to the market, you might see a little bit of resistance. But you will find that they will get done on a club basis. They will try to get the crew of banks in that they want to get in there and then try and see what they can raise in general syndication. Bank Muscat will be a great example to see how this tactic actually pans out when it gets out to the marketplace. Gilles Franck: The FIs face the same constraints as corporates when it comes to considering the alternatives, which are the bond markets where the pricing has ballooned out as well, meaning there's little arbitrage between the markets. Peter Bulbrook: The borrowing was very opportunistic last year and US$20bn or so was raised. But everybody that participated or had the relationship expected the next course of financing access to be the capital markets. However, that market is not there right now, not at the price they want to issue at. The dynamic on these deals that have been clubbed so far is interesting and probably underlies why we have not seen increased debt capital market requirement. They are very focused on their benchmark spread, as would be any financial institution, but they have been willing to supplement the all-in requirement for funding, or all-in for lending, by some significant fee packages. Benchmark spread is probably the most sensitive issue for any FI issuer, so that has been a feature in clubbing these situations today. Rizwan Shaikh: Raouf mentioned that Russia is seeing more issuance in the FI space relative to Middle East. A big factor driving this is that most of the pre-crisis issuance by Middle East FIs was three or five years. Russia, on the other hand, saw mostly shorter dated deals. So a lot of the Russian FIs need to come back to refinance the maturing deals and are having to pay out more. While the margins on some of these loans have been kept artificially low by paying higher fees, the all-in cost has gone up significantly for most financial institutions. Declan McGrath: The size of the transaction is also key and you are unlikely to see US$2.5bn to US$3bn financial institution loans as new deals will be kept at lower levels. IFR: How much relationship pull does an FI have? Grainne Molloy: I think it comes down to price. Some of the FI lenders we speak to say, "We are not going to support our competitor at that price". Rizwan Shaikh: The relationship groups for FIs differ from corporates in the sense that you have a wide group of correspondent banking relationships spread out thinly, which can be leveraged to get small tickets. Corporate bank groups tend to be smaller but they are able to concentrate their relationship in terms of cross-sell and therefore can extract bigger tickets. So invariably in corporate deals, you tend to find smaller syndicates compared to FI deals. Grainne Molloy: Having a good rating h