The busy Gulf loan market has been dominated by regional banks at the fore in recent years, arranging deals and taking big tickets. But local lenders will not be able to dominate in 2016.
Faced with a depressed oil price, a local liquidity squeeze and increased costs of funding, regional banks will not be able to compete with European banks.
“With their rising cost of funding, the regional banks are being very selective about which issuers they choose to support,” says Richard Hill, head of loan sales and trading at Société Générale in London.
As international lenders retreated to their core markets in the post-crisis years, regional and domestic banks stepped in to fill the gap. That is now changing.
“I think we are going back to a pre-2007-8 type of construct where the providers of capital are largely international banks, because the local banks could not compete on price and were crowded out,” says Rizwan Shaikh, head of CEEMEA loan structuring and syndication at Citi in London.
The reversal will be felt the most by top tier borrowers in the Middle East, a trend that is beginning to be seen. When Abu Dhabi National Energy Co (Taqa) launched a $3bn five year deal in August with a margin of just 50bp, local lenders grumbled at what they called an “aggressively priced” deal.
Throughout last year similar deals cropped up, such as Commercial Bank of Qatar’s $800m three year refinancing, where local bankers said the 100bp margin was just too tight for them. Only international lenders with a relationship angle will be able to commit to such tightly priced deals in 2016.
Oil change
The collapse of the oil price has had three big consequences for Gulf loans: increased issuance by banks and sovereigns to replace funds lost from oil; tightening liquidity; and widening margins.
Many financial institutions issued loans in 2015 for the first time for up to 10 years as cash deposits fell across the region.
In September Abu Dhabi’s Union National Bank signed its first loan in nine years, a $750m three year deal.
Pitching the deal at the right time, UNB (rated A1/A+) secured a favourable margin of 75bp over Libor and all-in pricing of 105bp.
“We saw a window of opportunity in the market,” says Mona Zein Eldin, senior vice-president and head of financial institutions at UNB in Abu Dhabi. “There was liquidity and good appetite for our credit. We also saw that there might be a slight tightening of liquidity going forward as a result of the economic and geopolitical conditions.”
It wasn’t just top tier banks that came back to market, but also cash-hungry, lower rated issuers. United Arab Bank (Baa1) signed a $125m three year loan in September.
In early November there were at least three deals in the market for banks: Commercial Bank of Qatar, Doha Bank and Banque Misr. All-in pricing was just 100bp over Libor for CBQ and 95bp for Doha.
But tight pricing will not last.
The influx of deals is pushing pricing up, with a tense atmosphere around pricing deals towards the end of 2015. One banker described it as a game of chicken where one issuer would have to give in and pay a higher margin than its competitors.
But even when margins widen, as they inevitably will, the increase will be small. “If you take emotions out of spread widening and look at your total cost of funding in context, it’s still super-attractive,” says Shaikh.
Sovereigns dive in
As cash dired up in 2015, Gulf sovereigns launched loans for the first time for years, to make up for growing fiscal deficits.
Oman was the first, launching general syndication of a $1bn five year loan in November with a margin of 100bp after posting a fiscal deficit for the first time in five years. Oil accounts for just less than half of Oman’s gross domestic product, slightly more than half of its exports and three quarters of government revenue.
Qatar followed, and was in talks for as much as $10bn of loans in early November. Bankers expect more sovereigns to seek loans in 2016. Bahrain is a likely candidate as it is heavily exposed to the oil price. Saudi Arabia has a burgeoning current account deficit. It is expected in the bond market in 2016 and could follow with loans.
Russian loans: back to basics
Russia produced just a handful of clubby international syndicated loans last year and while dealflow will not grow sharply in 2016, a wider group of lenders are taking part.
The Russian loan market was snuffed out by financial sanctions implemented in late 2014 by the European Union and the US. But in April 2015, the first post-sanction deal closed, for fertiliser producer Uralkali, a $530m four year pre-export facility. Like all Russian firms issuing loans in 2015, Uralkali is not sanctioned but its loan documents must account for the possibility of it becoming sanctioned.
The market hoped that Uralkali would start a spring of Russian deals but it was not until September that more loans creaked out. EuroChem, Metalloinvest, Novolipetsk Steel, Polymetal and Russian Copper Co all succeeded with deals.
But all of the loans were pre-export finance facilities arranged with clubs of banks. This tried and tested route for deals will only change when the Russian loan market is no longer encumbered with sanctions.
“The market is still open but the floodgates are not. A smaller number of top tier issuers can do
deals which are very clubby,” says Graham Lofts,
head of international loan origination at Commerzbank in London.
But while the structure of deals is limited to only the most plain vanilla, a growing group of international lenders will rejoin the market. “Liquidity is coming, slowly but surely,” says Damien Lamoril, head of EMEA loan syndicate at Société Générale in London. “There were five or six hard-core banks in the Russian market at the beginning of the year. Now there are 10 or 12, including Chinese and Russian lenders.”
The market may hope for change at the end of January, when the European Council (EC) will review its sanctions on Russia. But the EC has said more needs to be done in Ukraine to de-escalate tensions. That makes a revocation of sanctions and a re-opening of the market in the near future unlikely.
Slow take-off for African loans
Nigeria failed to meet the loan market’s high hopes for it in 2015 with currency depreciation and crashing crude prices holding back issuance across the continent.
Nigeria’s elections in April were supposed to bring stability and ignite deal flow, but by the end of 2015 only a handful of deals had come to market.
“We had hoped for a revival of deals from banks in the fourth quarter,” says Charles Corbett, head of loan syndications for Africa at Standard Chartered in London. “Maybe one to two year tenors for top tier names, but that hasn’t happened.”
First City Monument Bank, Ecobank and Stanbic IBTC finally came to the market in October, but the risk premium for Nigeria meant pricing for those deals had increased by as much as 100bp in the last year, although FCMB paid an additional 60bp.
Nigeria’s new government, only installed in November, will boost confidence for loans but the market is still grappling with a weak naira and shortage of dollars.
The Central Bank of Nigeria limited currency trading in 2015 to prevent further depreciation of the naira after it fell by 20% during the year. Volatile exchange rates will have a crucial impact on African loans in 2016, driving issuers away from dollar loans and into local currency markets. In the past year, the Kenyan shilling has fallen by 15% against the dollar and the South African rand by 26%.
As low oil prices deepen deficits for oil-exporting countries, more African sovereigns and supranational borrowers will come to the market.
Kenya came in October for a $600m two year loan with a margin of 520bp, as it faces a fiscal deficit of as much as 9.4% of GDP in 2014-2015.
The Africa Finance Corp, African Export-Import Bank and the Eastern and Southern African Trade and Development Bank were in talks for loans at the end of 2015.
African infrastructure had a clear win in 2015 when Kenya Pipeline Co completed its long-awaited $350m 10 year infrastructure loan, supported by a mix of African and international lenders.
But international banks still have lacklustre enthusiasm for riskier, long dated financing and European lenders are expected to reduce lending infrastructure.
But as international banks grow cautious about investing, local banks and private equity firms will fill the gap. “Private equity has been fairly active, but increasingly on the debt side we are seeing alternative providers coming in, filling the void left by the banks,” says Shaikh.
Domestic and regional banks in Africa are competing more aggressively for deal mandates, according to Hiren Singharay, managing director and head of syndication, Europe, at Standard Chartered. “My biggest competition in Africa is the local banks,” he says. “They are far more powerful than they ever were.”