Middle East&Africa - Political risk dominates

  • 16 Jan 2004
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The Iraq war put the Middle Eastern loan market into suspended animation for six months — but since then it has come alive. Charlie Corbett reports.

World events took their toll on the Middle Eastern loan market in the first half of 2003. Deals were delayed and volumes reduced as borrowers and lenders alike watched cautiously from the sidelines as the drama in Iraq unfolded.

The war was swift, and it did not take long for activity to resume, but the market was left with much ground to catch up.

In 2002, there were 71 syndicated loans to Middle East borrowers totalling $18.06bn. By early December, the volume of lending in 2003 had reached just $12.19bn, with 49 deals completed.

The removal of Saddam Hussein, however, had a positive effect. It neutralised what has been seen as the region’s greatest threat and encouraged investors, both internationally and in the region itself.

“Following the end of the war in Iraq, stability returned to the Gulf region,” says Raouf Jundi, vice president of the syndications group at Bank of Tokyo-Mitsubishi in London. “Atmosphere in the Middle Eastern loan market improved considerably.”

High oil prices buoyed liquidity in the region and asset-hungry local banks were keen to invest, particularly in each other.

“Regional banks are playing a much bigger part,” says Kim Humphreys, head of corporate and sovereign syndications at Mizuho in London. “There has been more intra-regional lending, thanks to the increased flexibility given them by central banks.”

Eight Middle Eastern banks came to the market in 2003 (compared with four the previous year), for loans with a combined volume of $1.3bn.

“Despite some geopolitical concerns, as far as credit risk is concerned Middle Eastern and particularly Gulf-based banks are seen as attractive,” says John McWall, vice president of syndications at Arab Banking Corp in Bahrain. “Recent deals have had strong support from international as well as regional lenders. Economies of Gulf-based countries are projected to do well over the next few years and regional banks are putting funding in place to support projected new business as they look out into 2004 and beyond.”

Stiff competition in South Africa

South Africa produced a slight increase in loan volume last year of $3.1bn by the beginning of December, compared with $2.9bn in 2002; but the number of deals fell from 15 to 12.

“It has been a keenly fought market and opportunities were thin on the ground last year,” says Chris Day, a vice president of syndications at Bank of Tokyo-Mitsubishi. “Top quality borrowers are spoilt for choice, lenders are queueing up. Banks want to do business but the volumes just aren’t there.”

South African loans were typically oversubscribed, so prices remained low.

The Reserve Bank of South Africa’s $1bn three year deal was oversubscribed by $2.05bn. The borrower did not take an increase.

The deal paid a margin of 67.5bp over Libor, 2.5bp lower than the deal it refinances, which was signed in 2000. The usual borrowers from sub-Saharan Africa returned to the market. Sonangol, the Angolan state owned oil company, approached lenders twice for a total of $1.7bn.

The first transaction, a $1.14bn 5-1/2 year facility, was the largest and longest the borrower has ever attempted. It was successfully signed in September, paying 225bp over Libor from drawdown to year three and 250bp thereafter.

The Ghana Cocoa Board (Cocobod) also tapped the market for $500m, its annual one year pre-export finance facility.

Bankers remain sceptical about investing in Africa and in 2004 loan market activity is not likely to be much different. The same few well regarded borrowers are expected to return, with few new mandates.

Pricing was a contentious issue and margins fell all year. A protracted three month bidding war took place between Commercial Bank of Kuwait (CBK) and potential investors, before it eventually mandated banks for its $250m deal.

CBK accepted a last minute bid from ABC and Sumitomo Mitsui Banking Corp, undercutting Citigroup, Gulf International Bank (GIB), Standard Chartered, Sanpaolo IMI and Mizuho, which thought they had the mandate sown up.

Pricing is said to stand at 40bp over Libor, 8bp less than what Bank of Bahrain and Kuwait paid for its $125m deal, signed in July.

“Pricing in the region definitely went down in the third and fourth quarters,” says Jundi. “If the trend continues it will cease to be attractive. It is unlikely for prices to go up in 2004 — they will probably stabilise.”

Projects test maturity appetite
Project financing for the first half of 2003 continued to be characterised by long maturities, lower pricing and decreasing interest from the bigger international banks.

The $1.77bn Umm al Nar power and water project deal was signed in mid-September, but was one of the few deals to be closed by the third quarter. “There is concern over maturities,” says Mizuho’s Humphreys. “Banks are reaching their fill on 20 year exposure, especially for power projects.”

In the second half of the year, with the threat of war in the past, interest was revived.

The $907m Sohar Oil refinery project was launched into general syndication in early October and closed in November oversubscribed by one third.

The sub-underwriting phase of the $3bn loan for the Baku-Tbilisi-Ceyhan pipeline (BTC) from Azerbaijan through Georgia to Turkey also proved immensely popular.

The banks leading the deal — ABN Amro, Citigroup, Mizuho and SG — raised so much early on that they questioned whether they needed a retail syndication at all. The deal was expected to be completed in December.

“It is a ground-breaking and exciting transaction that banks want to be involved with — it is well structured with good sponsors and involvement from export credit agencies,” says one banker.

This year is expected to be busy, with at least six power and liquefied natural gas (LNG) projects planned in the region. “Qatar will be a boom economy this year,” says Humphreys at Mizuho. “They are looking to substantially improve infrastructure.”

Jundi at BTM expects more than $8bn of projects to come to fruition in 2004. “Due to economies of scale and new technology, the cost of production is coming down dramatically in Qatar for LNG projects,” he says.

  • 16 Jan 2004

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 414,341.60 1584 9.03%
2 JPMorgan 377,311.36 1724 8.23%
3 Bank of America Merrill Lynch 358,416.32 1295 7.81%
4 Goldman Sachs 266,063.47 914 5.80%
5 Barclays 264,598.20 1056 5.77%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 44,979.63 190 6.72%
2 Deutsche Bank 37,019.66 134 5.53%
3 BNP Paribas 35,303.69 205 5.28%
4 JPMorgan 33,752.71 110 5.04%
5 Bank of America Merrill Lynch 32,865.23 106 4.91%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 22,398.41 104 8.72%
2 Morgan Stanley 18,608.72 99 7.25%
3 Citi 17,768.49 110 6.92%
4 UBS 17,372.80 70 6.77%
5 Goldman Sachs 17,228.66 97 6.71%