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.
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