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Emerging MarketsEM Middle East

Middle East issuers should be playing the long game with bond fees

Middle East fees for bonds have been crunched over the last year as competition heats up in the region to win mandates and other ancillary business. But issuers must be careful not to kill the golden goose.

Bankers have told GlobalCapital that one in three Middle East mandates are now being won on the strength of bond arranging fees paid at around 0-2bp, with anchor orders from their treasuries thrown in for good measure. Some banks are happy to proceed with offering their services on those terms.

Upfront, that is a great deal for the borrower. And some banks — mostly the big international banks — say that looking at the business as a whole is the key to not losing sleep over the profit hit the DCM desk has taken. They say if you roll in revenues from M&A in the region, cash management and trading, the Middle East business doesn’t look too bleak as a whole.

But the same arguments that have rolled around the emerging markets for some time as fees are crunched are being dusted off. 

How do you get your sales team to give their all when the payout is so small? If you have several deals in the market at once, will the issuers that aren’t paying as handsomely be pushed to the bottom of banks’ to do lists? Doesn’t it get tempting to put your new grad trainee on that one rather than the managing director with experience?

So far, so similar to other regions and those other regions seem to more or less get by. 

But in the Middle East, there has also been a noticeable churn of banks of late. Royal Bank of Scotland has been the most notable departure from the region while several other banks are thought to be reconsidering their businesses there as part of the wider stress on EM as they grapple with new bank capital requirements. 

There is some pushback to these fees. Most banks are making the decision on a case-by-case basis having decided that not every deal is worth doing for a piffling payment. But fee compression in DCM makes it harder for teams to justify their presence in the region from the point of view of the profits available and the size of the market willing to pay.

At the moment, Middle East borrowers are spoiled for choice with regards to lending. Local and international banks are extending longer and larger credit lines with looser covenants for the glory of trapping the ancillary business that goes alongside it. This is also in part why the bond fees have been slashed.

But if banks can’t make this region profitable enough in the new environment of bank capital concerns, they will retreat. With them will go the generous lending that Middle East issuers have become so used to. And with the lack of competition that will follow, bond fees could go back up.

It is understandably tempting to grab the opportunity of an almost free service while it is offered. 

But Middle East borrowers have a reputation in the bond market as issuers that play the long game — they don’t grab every basis point in pricing to ensure that market is there for them in the future. They should consider whether it is worth extending the same courtesy to their banks.

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