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Mon 5 Mar 2012 05:05 PM

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ME loans at 8-year low as Europe banks retreat

Borrowing costs for companies in region have risen sharply

ME loans at 8-year low as Europe banks retreat
Middle East and North Africa lending fell to the lowest level in eight years.

Middle East and North Africa lending fell to the lowest level in eight years as European banks retreat from the region due to the sovereign-debt crisis and as companies pursue record bond sales.

Borrowers based in a region that includes Persian Gulf oil exporters Saudi Arabia and the United Arab Emirates raised US$1.97bn of syndicated loans in January and February, the lowest amount for the same period since 2004 and 40 percent less than in the first two months of last year.

Europe’s debt woes, which led to last month’s
€30bn (US$172bn) bailout for Greece, is forcing European lenders to trim more than
€775bn from their balance sheets. As a result, loan borrowing costs for companies and financial institutions in the Middle East and North Africa rose to an average 210 basis points more than benchmark rates since October from 196 basis points in the first nine months of 2011, according to data compiled by Bloomberg.

“Many international banks are experiencing their own difficulties, for example capital constraints, and are less inclined to participate in syndications in the region,” Philip Smith, senior director of financial institutions at Fitch Ratings., said in a telephone interview in London on March 2.

Pricing may also affect syndicated loan volumes as international lenders try to obtain higher spreads, Smith said.

An increase in risk appetite this year has meant regional companies are able to borrow money more cheaply through bond sales. During the first two months of 2012, companies in the region raised a combined US$9.2bn from conventional and Islamic bond sales, the most since Bloomberg began tracking debt sales in the region in 1999. That surge compares with US$1.1bn in same two months last year, Bloomberg data show.

Average yields on corporate bonds in the Middle East declined 25 basis points, or 0.25 of a percentage point, so far in 2012 to 4.969 percent on March 2, according to the HSBC/DASDAQ Dubai Middle East Conventional Corporate US Dollar Bond Index.

“Historically, bond issuance in the region has been quite low but this is changing as the market matures,” Smith said.

Sales of sukuk, which comply with Islam’s ban on paying interest, surged more than eight-fold to US$5.9bn in the predominately Muslim Gulf Arab region so far this year.

That includes a US$4bn Islamic bond sale by the civil aviation authority of Saudi Arabia, a nation of 28m people which has committed to investing more than US$500bn to develop infrastructure and create jobs for youth.

Companies in the Middle East had long favored bank loans over bonds due to the lack of development of regional debt markets. In 2007, Middle Eastern companies raised a record US$109.6bn in syndicated loans, while bonds in the region amounted to US$34.3bn data compiled by Bloomberg show.

That year, all of the top ten mandated banks for Middle East and North Africa lending were based outside the region, including seven from Europe. European banks have since scaled back their regional business as European Union governments take steps to contain the sovereign-debt crisis, leading to a rise in borrowing costs.

“If the international banks are retreating we can see local banks taking up the balance,” Alexis Postel-Vinay, head of loans syndications, Middle East at BNP Paribas said in an e- mailed response to questions on Feb. 29. Capital ratios of most UAE banks exceed 20 percent, which are “much higher” than many European and US institutions, he said.

Return of Europeans

In 2011, syndicated lending in the Middle East and North Africa fell to US$43.3bn, the lowest level since 2009, and only three of the top ten banks were from Europe, data compiled by Bloomberg show. Regional lenders including National Bank of Egypt took up four of the top spots. So far in 2012, half of the top 10 mandated banks are based in the Arab world.

European banks may engage more in the region as borrowing costs for European banks start to fall. The three-month London interbank offered rate, or Libor, fell ten basis points from this year’s high of 0.582 percent on January to 0.486 percent on February 29. This is an increase of 24 basis points from a low of 0.245 percent on June 15.

The three-month Emirates interbank offered rate, the rate at which banks in the UAE lend to each other, fell to 1.47 percent on August 8, the lowest level since Bloomberg began collecting data in September 2006. It has since risen seven basis points to 1.536 percent today.

Refinancing Needs

“With significant volumes of 2007-legacy transactions due for repayment in 2012 we are anticipating a pick-up in volumes later in 2012 as borrowers engage with lead arrangers on their refinancing requirements,” John Starling, a director for HSBC Holdings Plc’s loan syndicate in London, said in an e-mailed response to questions on February 28.

Loans valued at US$43.9bn will mature in the region this year, an increase of more than US$10bn from US$33.6bn last year, according to data compiled by Bloomberg. GCC companies have almost US$90bn of foreign-currency debt maturing through the end of 2013, according to a December 19 estimate by Barclays Capital analysts.

Dubai and its state-controlled companies face about US$10.3bn in debt repayments this year, according to Bank of America-Merrill Lynch estimates.

Other countries in the Gulf Cooperation Council, which includes the United Arab Emirates and Qatar, are also spending on infrastructure as they benefit from a rise in oil prices above US$100 a barrel this year. Qatar, the world’s top exporter of liquefied natural gas, has ramped up spending as it prepares to host the 2022 Soccer World Cup.

Banks are likely to pick up some of the financing slack, even if volumes are lower than last year.

“Our commitment to the region remains the same, emerging markets are important to us, but there are some European banks that have chosen to exit,” Simon Meldrum, director of central and eastern Europe, Middle East and Africa loan syndicate at Royal Bank of Scotland, said in a telephone interview in London on March 1. “It’s a quiet start to the year, but we are only two months in so I wouldn’t draw too many conclusions.”

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