Last Updated: Thu Oct 27, 2011 19:40 pm (KSA) 16:40 pm (GMT)

Arab Gulf states pitch new finance tools as their credit dries up in face of big projects

Arab Gulf states are looking for new ways to raise funds for their mega infrastructure projects and refinancing needs of companies whose traditional funding source, bank financing, has dried up. (File Photo)
Arab Gulf states are looking for new ways to raise funds for their mega infrastructure projects and refinancing needs of companies whose traditional funding source, bank financing, has dried up. (File Photo)

Banks in the Gulf are pitching new ways of raising funds to meet big infrastructure and refinancing needs of companies whose traditional funding source, bank financing, has dried up.

Equity raising in the Gulf, with the exception of Saudi Arabia, is practically moribund as investors fret about the euro zone crisis, while the overhang of Dubai’s debt woes and market uncertainty have held back global bond issuance from the region, pushing new issue premiums to unacceptably high levels.

Under such circumstances, bankers at the Reuters Middle East Investment Summit said that they saw chances to pitch unusual or innovative products to clients in a region with massive funding needs.

“Most clients ... don’t need to be convinced that they really can’t rely on the bank market any more. The hard part is helping them understand what the other pools of capital are and how to access them,” said Augusto Sasso, co-head of Middle East and North Africa (MENA) investment banking at Moelis.

“We need to be able to do a better job of accessing the various forms of the bond market,” he added, saying borrowers should be open to secured or unsecured, non-investment grade, high yield bond and mezzanine financing as options.

Some borrowers have already ventured into new territory.

Dubai, whose 2009 debt crisis rocked global markets, undertook two deals uncommon in the Gulf market this year − an $800 million loan to be securitized by road toll revenues for infrastructure development, and a $500 million 10-year bond incorporating a 5-year “put” option.

The high demand for a slice of the Salik road toll deal allowed Dubai to tighten pricing to 325 basis points over the London interbank offered rate (Libor) from 350 basis points.
Other borrowers have opted to tap liquidity sources through bond issues in yen or ringgits, as well as exchangeable bonds, “coco” bonds, or structures which include an amortization element, with various degrees of success.

Abu Dhabi wealth fund Aabar raised 1.25 billion euros ($1.76 billion) from the sale of bonds exchangeable into the German automaker Daimler's stock in May.

Tough conditions

Capital market activity in the Middle East had a tough third quarter as dealmaking slumped and companies dropped plans to raise debt.

Overall investment banking fees declined 35 percent to $316.6 million in the first nine months of the year, compared with $483.8 million in the prior-year period, Thomson Reuters data showed.

“(Next year) will be a much bigger year than 2011 for fixed income,” said Simon Eedle, regional head of fixed income markets for French bank Credit Agricole .

“It won’t just be the regular bond market, we'll see more on project bonds ... I think securitization has a role to play. From risk-weighted perspective, some form of collateralization makes sense.”

Debt issuance reached $14.2 billion to the end of September, down 36 percent from the year-ago period, the data showed, with investment grade corporate debt accounting for a big majority of bond sales.

“When you have assets and/or the right level of income, you can solve upcoming debt maturities with the right amount of creativity,” said Salman Khalifa, global markets head for MENA at Deutsche Bank.

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