Even before the most recent shocks, deal activity was lacklustre, with declining number of IPOs and mergers and acquisitions
Times are especially tough for dealmakers in the Gulf, where the currents battering global markets have converged. But a simple question did brighten a senior banker’s mood the other day: He burst out laughing when asked about his next initial public offering.
The promise that Saudi Arabia would anchor a regional investment-banking boom moved further into the distance after the crash in oil prices.
The reaction Monday in Dubai’s financial centre amid the market rout ranged from gallows humour - jokes about stocking up on toilet paper - to resignation to some guarded optimism. The bankers and lawyers all agreed that no clients would be making any critical decisions until the dust settles. Some complained air-travel restrictions related to the coronavirus meant they couldn’t visit those few customers contemplating moves.
“This kind of uncertainty may affect investment decisions and will require strategic and tactical adjustments but will also create new opportunities,” said Miguel Azevedo, head of investment banking for the Middle East and Africa at Citigroup Inc.
Agility Public Warehousing Co. was one of the first to retreat amid the carnage. The Kuwaiti logistics firm said Sunday it would consider alternatives to London for the listing of one of its subsidiaries. Amlak International, a Saudi consumer-finance company, postponed an announcement to sell shares, according to people familiar with the matter. A spokesperson for the company didn’t immediately respond to a request for comment.
The fallout of the oil-price war and the coronavirus shocks risk setting off a vicious circle undermining economic-liberalisation efforts that depend on foreign capital. Investment banking fees would be collateral damage as plans for privatisations and large-scale investments in non-oil sectors evaporate.
The bankers’ sombre mood contrasts with recent optimism about prospects in Saudi Arabia. Global heavyweights such as Goldman Sachs Group Inc. and HSBC Holdings Plc have chased trophy deals, such as massive sovereign bond sales and Saudi Aramco’s record initial public offering.
Aramco’s share sale was supposed to herald a change in sentiment for regional capital markets activity. For three years, investment bankers shuttled back and forth between the company’s headquarters in eastern Saudi Arabia and various finance centres, but the IPO concluded with an anti-climax after the company decided to pull its international listing. The fees the banks earned fell way short of the IPO’s pre-sale hype.
Even before the most recent shocks, deal activity was lacklustre. The number of listings in the Gulf countries last year declined from the two previous years, according to figures from data provider Dealogic. The number of mergers and acquisitions also fell, Dealogic data shows.
The outlook only darkened in the past few days after the OPEC+ alliance led by Russia and Saudi Arabia collapsed.
Oil crashed more than 30% after the breakup triggered a price war, sending equities plunging. As the markets were absorbing that shock, Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman had authorities round up the brother and a nephew of Prince Mohammed’s father, King Salman bin Abdulaziz, on the grounds they were plotting a coup, according to a person familiar with the matter.
“So much of what happens under MBS’s leadership is based on the element of surprise, of shifting balance, and claiming control,” said Karen Young, a resident scholar at the conservative American Enterprise Institute in Washington. “But the biggest threat to Saudi right now is the possibility of very low oil prices, back to 2015 or lower levels. This the crown prince will find harder to control.”
The weekend’s events sent shock waves across the region’s already fragile markets following the unhappy plight of Abu Dhabi’s troubled hospital operator NMC Health Plc, Aramco’s truncated IPO and DP World Plc’s surprise delisting.
Still, the region’s troubles mean even more work for some. Restructuring bankers remain as busy as ever. NMC appointed Moelis & Co. as an adviser, while the family office of the company’s founder hired Houlihan Lokey Inc. One senior restructuring specialist quipped that his business was a natural hedge against other banking activities.
The malaise of NMC, which is being investigated by the UK’s financial regulator over fraud allegations, comes less than five years after Saudi Arabia opened up to outside investors and highlights the region’s stuttering status as an investment-banking destination. Still, foreign direct investment in the kingdom was about eight times higher a decade ago than it is today.
“When big prominent firms like NMC falter where standards were not respected, maintained and monitored, they generate reputational problems for not just the UAE but the whole of the Middle East region,” said Nasser Saidi, the former chief economist of Dubai’s financial centre.
Finance pros in the region are concerned that the accounting scandal at NMC could ripple through the capital markets the same way the 2018 collapse of Abraaj Group snuffed out private equity in the Middle East. Financial red flags raised by foreign investors like the Bill & Melinda Gates Foundation led to the flameout at Abraaj.
“The Gulf region is facing a twin crisis from coronavirus and declining oil prices that will be incredibly difficult to manage in 2020,” said Ayham Kamel, the head of Eurasia Group’s Middle East and Africa research team. “Foreign investors are less likely to venture into countries with higher risk profiles.”