By Frederik Richter
Finance managers see credit crunch causing more cancellations of Mideast projects.
More projects are expected to be delayed or cancelled in the Gulf region this year as banks feel the full pinch of the global financial turmoil, project finance managers said.
"It has been apparent that there really isn't any depth in the market out here for long-term finance and that is a critical problem for the market," said Darren Davies, regional head of project finance at HSBC.
Davies was speaking on the sidelines of the Middle East Economic Digest 2009 project finance conference in Manama.
The six-year oil boom which fizzled out in late 2008 has made project finance a top activity for banks in the Gulf Arab region, but financial woes have triggered project cancellations and delays in the world's top oil-exporting region.
In Bahrain, the $2.2 billion Al Dur power and water project jointly owned by Kuwait's Gulf Investment Corporation and France's GDF Suez has been delayed due to tight international lending criteria.
The refinancing of the Al Dur power project in Bahrain will be the ultimate test for where the project finance market stands, delegates at the conference heard.
"The entities that are going to get deals done are the major developers and sponsors who have the strongest banking relationships," added Derek Rozycki, director for project and corporate finance at Abu Dhabi's state investment firm Mubadala said.
Bankers said the deals that will be done this year will typically have a much shorter tenure than before the credit crisis, and will have lower volumes.
This, however, is also due to the current decline in projects' capital costs, as commodity prices are falling and as contractors facing stiff competition over fewer projects lower prices.
Davies estimated that capital costs will come down between 40 and 50 percent off their peaks last year, prompting sponsors of mega projects to wait for the second half of the year to benefit from lower costs.
"If you take a little bit longer to get your project going, you get a much better price," he said.
Bankers also said project finance in the region needs to attract investors to bond issues and bring in local money if the market is to rebound.
A constraint to the project finance market in the region has been a lack of project bonds.
Most bonds issued in the Gulf Arab region are bought by banks, which effectively makes them a loan instrument rather than a fixed-income instrument.
The project finance market in the Gulf region also remains dominated by Western banks that cut down on their investments in emerging markets when the credit crisis unfolded.
Mubadala's Rozycki said it is looking for more financing for its Zayed University project during the first half of the year, but at a much shorter tenure than the 20-year financing it secured for its Paris Sorbonne University campus project.
The $323 million syndicated loan arranged by First Gulf Bank was one of the few deals done in the last quarter of 2008. (Reuters)