The myth of the Middle Easts immunity from the global financial crisis was, by the end of 2008, well on its way to being dispelled. Local economies may still have been awash with oil money, but throughout the year, the international capital which had funded so many banks and companies expansion plans had become increasingly hard to come by, and increasingly expensive.
The lack of new deal syndications after September 2008 showed just how much the woes of the Western banking world had caught up with the Middle East.
The global crisis became, at that point, the biggest stumbling block of all, while regional issues such as the lack of dollar liquidity among local banks, or borrowers complaints about rocketing pricing took a back seat.
"The main challenge is the broader lack of confidence and the global contagion," says Rizwan Shaikh, a director in the fixed income capital markets team at Citigroup in Dubai. "Banks cannot take the Middle East and look at it in isolation."
The outlook for the Middle Eastern loan market for 2009 mirrors the predictions for other regions, including western Europe. There will be fewer deals and these will be smaller and formed on club bases. At least for the first half of 2009 underwriting, for most borrowers, will be out of the question.
"2009 is definitely going to be tough, and we wont be able to do the type of deals which have been done in the last two to three years," says Saadaat Yaqub, head of debt capital markets at Noor Islamic Bank in Dubai. "There will be fewer and fewer borrowers willing to come to market, and pricing is going to go up by a lot."
But amid the gloom, a renewed confidence in the resilience of the region to the global crisis is already making itself felt. Under the pressures of the financial turmoil rocking the world, the GCC states have shown that they are willing and most importantly able to support local banks and companies.
"I was very worried about the Middle East and about refinancing risk there until about 10 days ago," said one loans banker, speaking in the last week of November. "Now that the region has been put under pressure and has had to react, and people are more confident the GCC countries will use all the resources at their disposal to help borrowers. They certainly have the capital to underpin these deals."
Refi fears abating...State help has not arrived, in most cases, in the shape of headline announcements about bailout packages and rescue plans. But there are escalating rumours of money being dolled out behind the scenes.
In the United Arab Emirates, for example, Abu Dhabi was at the centre of speculation at the end of November about an undisclosed rescue package destined to help Dubais highly levered borrowers.
Dubai was in the spotlight of the loan market in 2008 with one multi-billion dollar deal after another being launched throughout the year, but many of them faltered. Estimates from ratings agencies that Dubai-based entities had between $50bn and $100bn to refinance by the end of 2009 had begun to spook some lenders. But by the end of 2008, these fears were abating.
"Its looking increasingly unlikely that the authorities will let anything negative happen within the UAE which could have an effect on the risk perception of the UAE," says Hasan Mustafa, head of CEEMEA syndicate at Royal Bank of Scotland in London. "There appears to be a resolve, at the federal level, to ensure that the market does not question Dubais or the UAEs ability to refinance.
"This, however, has no bearing on where UAE risk will be priced in the medium term as, in my opinion, they have been comfortably slotted back into the emerging market category."
Indeed, refinancing risks may have been somewhat assuaged, but this does not mean this year will be easy for the regions borrowers.
On the rare transactions launched at the end of 2008, the big increase in margins was already visible. The challenge for Middle Eastern borrowers will be to accept this.
It is a struggle exemplified by the fate of the $350m facility for DIFC Investment, part of Dubai International Financial Centre, launched at the end of November. The deal, led by Goldman Sachs, had been priced to sell it carried all-in margins of 525bp over Libor, a remarkable increase given that the same borrower had come to market six months earlier with a loan priced at 75bp.
A week later, however, the transaction was withdrawn from syndication. The $500m loan signed in March which the $350m loan was meant to refinance was instead repaid in full. The Dubai government, according to bankers away from the deal, had deemed the pricing too high.
...but margins still risingDIFCs transaction illustrates what is set to become one of the biggest debates of 2009: how to price deals in the Middle East.
For some, DIFCs aborted loan set an adequate pricing benchmark.
"The government may have said were not paying that, but the deal also received four commitments in a day before it was pulled," said one banker away from the loan. "And if you look at Dubais CDS, which at that point was about 650bp, it was really in line with what borrowers like that should be paying."
Other loans bankers, however, had been critical of the pricing at the time the deal was launched, saying it was not enough for a company like DIFC.
"Its a well known name, and its backed by the government, but its not a strong, cash-generating business," argued one official. "These are the type of borrowers which will have more trouble than others."
It is hard to envisage a message such as this going down well with local authorities and borrowers if 525bp was already too high to stomach. But the rise in pricing will be unavoidable this year, if Middle Eastern banks and companies want to access foreign capital and whats more, high margins on their own might not be enough to get a deal away.
Bankers will also be studying the credit quality of borrowers much more closely. Having a link to the sovereign may not, in itself, be enough to persuade participants to come into a transaction.
Dubai Aerospace, for example, which is government controlled, came to market in July last year with a $1bn facility, but the deal struggled to attract commitments. It was restructured with higher pricing, different currency tranches and an Islamic piece added in and brought to the market again at the end of October. By mid-December, it was still being marketed to investors, and while the deals timing and difficult conditions may have been partly to blame, loans bankers pinned the syndication struggle on lenders reluctance to expose themselves to the credit.
"Its a business that requires an awful lot of investment, and yet is not going to be generating a lot of cash, at least for a long time," said one London-based banker. "Its just not the type of company people are keen on at the moment, no matter how close to the Dubai government it may be."
Like for other regions, loans bankers stress that margins will need to be set on a case-by-case basis. Different countries will have to be studied in isolation Dubai-based borrowers may not be facing the same issues as ones in Kuwait or Qatar, for example.
And more than ever before, borrowers will have to tick all the right boxes.
"Everything has to stack up: the relationship, the credit, whether its in a defensive sector or not, and the price has to be in line with other credit markets," says Shaikh at Citi.
Flexible structures favouredOne element which may stand loan arrangers in good stead this year is the flexibility towards which deals structures have evolved in 2008.
Local banks became increasingly reluctant last year to commit in dollars to transactions partly because of the uncertainty surrounding the depegging of GCC currencies from the dollar, but also the cost of funding in dollars for Middle East banks also soared.
Keen to capture whatever domestic liquidity was available, loan arrangers began structuring transactions to include local currency tranches. One of the most prominent and earliest examples was the $5.5bn facility for Dubai World, launched in May.
Split between four tranches with different maturities, ranging from two to five years, it also gave participants the option to commit in UAE dirhams.
It set down a marker for the type of structure which was to become the norm by the end of the year, and the multi-currency model is now employed throughout the GCC.
But Middle Eastern borrowers have also been willing to experiment with different pricing mechanisms to allow local banks to come into transactions. Bank borrowers in the GCC were among the first to implement a bank reference rate last year to calculate Libor. It was a move away from the screen-based version which penalised local banks unable to fund themselves at dollar Libor, and it is a method which bankers expect will be used throughout 2009.
"Pricing has increased for sure, and the interest rate mechanism will continue to be on a cost of funding basis, rather than Libor," says Mark Waters, head of debt capital markets for the Middle East at BNP Paribas in Bahrain. "This is to satisfy lesser quality and lesser rated banks and their relatively higher cost of funds.
"A good share of the market liquidity in the Middle East comes from the region and from Asia, and most banks are single-A, or triple-B, so by default, they pay more in terms of cost of funding."
Facilities are also being increasingly structured with Islamic tranches, or indeed as wholly Islamic transactions, even when international banks are among the lead arrangers. The $1.5bn commodity murabaha for Dubai Group, the financial services company, led by Western and Middle Eastern banks and closed in August is just one such example.
"There is a very strong realisation among borrowers that there is a strong demand for Islamic deals," says Yaqub at Noor Islamic Bank.
With analysts predicting at the end of 2008 that Islamic banks were well positioned to weather the financial crisis, this may be another feature of the Middle Eastern loan market which will help kickstart syndications this year.
For now, liquidity whether in dirhams or dollars remains scarce. But lenders to the region are pinning their hopes on it being among the first to recover.