No easy fix for Gulf loan market as Europe banks exit

Exodus ushers in an era of smaller, pricier loans as firm need to refinance debt
No easy fix for Gulf loan market as Europe banks exit
European banks are fleeing the GCC amid the euro zones economic woes
By Reuters
Thu 08 Dec 2011 02:44 PM

As European banks withdraw from the Gulf loan market, they
are leaving a gap which other banks are unlikely to fill completely - ushering
in an era of fewer, smaller and more expensive loans even as companies' need to
refinance their debt grows.

Lending in the region, which was already down on levels seen
in the boom before Lehman Brothers collapsed in 2008, has been curtailed
severely in the second half of this year by the euro zone debt crisis.

European banks have been forced to shrink balance sheets,
reduce risk and re-evaluate the amount of capital they can deploy into foreign
markets such as the Gulf. V. Shankar, Standard Chartered's chief executive for
Europe, the Middle East, Africa and the Americas, estimates about 50 percent of
cross-border syndicated lending in the Middle East and North Africa has come
from European institutions in recent years.

As a result, bankers say the Gulf loan market could regress
to the state it was in before the arrival of large amounts of foreign capital
early last decade.

"I'm sure we'll get smaller deals than we have been
used to in the last few years," said one regional loan banker, who
declined to be named because he was not authorised to speak publicly to media.

"Up to 2004, most deal sizes were modest but the market
took off from then as lots more banks got involved from outside the region.
While some of these banks will continue to support key relationships, this
correction will mean smaller deals as the local players can only make up so
much."

A smaller loan market may complicate the efforts of Gulf
companies over the next three years to refinance large amounts of maturing debt
that they took out before the boom; Moody's Investors Service, for example,
estimates that more than $10bn of debt owed by state-owned companies will
mature in Dubai next year.

The volume of loan deals in the GCC - Saudi
Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman - has fallen
off dramatically, with $5.5bn of loans written so far in the second half of
2011, compared to $15.8bn in the first half and $26.9bn in the last six months
of 2010.

The figure for the first half of 2008, the high-water mark
for the GCC loan market, was $44.2bn, with $28.5bn for the UAE alone.

The withdrawal of European banks, in particular French
institutions, is a major factor in the reduced volume. Project finance has been
a particularly strong area for French banks but none will be involved in the
planned loan for Qatar's giant Barzan gas project, bankers said; that loan,
which was expected earlier this year to total $4.7bn, is now set to be signed
in early December.

Meanwhile, fast-growing airlines in the region are having to
look for other ways to finance aircraft purchases after French banks scaled
back lending in this area.

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Since October, big Gulf companies have been rushing to issue
bonds; Abu Dhabi's International Petroleum Investment Co raised $3.75bn in this
way and Abu Dhabi National Energy Co (TAQA) sold $1.5bn in bonds this week. But
the mass of smaller companies cannot count on bond issues, especially with
global debt markets so unstable. They will continue to seek loans.

Asian banks are likely to fill part of the void left by
European banks. "Everyone is interested in exploring the Asian angle as we
start to see the withdrawal of European banks," said Stuart Anderson,
managing director and regional head for the Middle East at Standard & Poor's.

Asia has largely escaped the Western debt crisis, so its
banks would seem a perfect source of loan capital for the GCC, especially since
Malaysia has a well-developed Islamic finance sector. Growing Asian activity is
suggested by the presence of Malayan Banking Bhd at third place in the GCC loan
bookrunners table for 2011 year-to-date.

But it is the potential of Chinese banks, which have grown
in recent years to become some of the world's largest financial institutions by
market capitalisation, which gets most attention. While the number of GCC deals
with Chinese participation has been limited so far, much of the hype, according
to a European banker, is because Chinese banks tend to commit large amounts of
money when they do get involved.

An important caveat, however, is that much Chinese money is
only deployed when the financing has a direct link to China, the banker said.

"You won't see a Chinese actor stumping up hundreds of
millions of dollars, even to the likes of Etisalat, unless they are buying Chinese
parts or there is a strong Chinese angle," he said. Etisalat is the UAE's
blue-chip telecommunications giant.

A spokesperson for Industrial and Commercial Bank of China
(ICBC) said Chinese banks naturally focused on lending to Chinese companies
because of longstanding links between them.

"There is no preference with who we want to lend to but
it's just a natural effect of Chinese companies looking for Chinese banks, just
as French companies look to French banks to do their funding," said the
spokesperson, who did not want to be identified because of company policy.

"If they are a client of one of our branches in China,
it's very easy to ship that relationship here and continue with it. That being
said, we've been working hard locally to deal with key players in different
industries and they are part of our clientele as well."

ICBC has in the past looked at telecommunications, aviation,
petrochemicals and infrastructure in the Gulf, the spokesperson said. But while
it continued to expand in the region from its current bases in the UAE and
Qatar, there would not be a significant departure from its cautious lending
strategy.

"We are not aggressive in this region and we choose our
clients carefully."

Japanese banks may extend their already-sizeable presence in
the GCC, especially in project finance, but beyond that, there are not many
options for Asia to come to the rescue of the GCC loan market. This is because
banks from other countries do not have the scale, according to the European
banker.

Referring to a $3bn loan signed by TAQA last year, he said:
"While there were lots of Taiwanese banks in the syndicate, they were only
committing $5-10m tickets when others were putting up $200m."

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S&P's Anderson said: "Asian banks filling the
funding gap in the region is an interesting idea...[ but] at this juncture I
don't think they have the strategic interest or credit appetite to do so in any
meaningful way."

Citigroup is at the top of the 2011 bookrunners table for
the region, pointing to banks from the United States as potential replacements
for European institutions.

"It's a very important market for us and there are
plenty of opportunities to do business," said a loan banker at a US
lender. "It's not just what is happening in Europe but the fact that US
banks have got through a tough period at home and are coming back into areas
like the Gulf."

However, the large US investment banks are traditionally reluctant
to lend without the promise of fee-paying business -- something that is scarce
in the GCC right now, with capital markets only partially developed, mergers
and acquisitions activity weak and stock markets stagnant. That is underlined
by the absence of any U.S institution apart from Citigroup in the top 25 places
on this year's bookrunners table.

Much therefore may depend on the ability of local banks in
the Gulf to satisfy the region's borrowing needs.

"They have been crowded out by the Europeans in recent
times but their withdrawal means they will be able to play again," the US
banker said.

In the past, local banks' higher cost of dollar funding made
many deals uneconomic for them; as loan pricings now become more expensive, the
banks are likely to play a bigger role, a London-based banker said. Also, local
banks may come under political pressure from their governments to support their
economies.

But the extent to which this is possible is in doubt, said
the regional loan banker.

"We will be able to provide some additional capacity
but there will be a big, gapping hole if the Europeans retreat for any
significant period," he said.

Borrowers in the Gulf will have to revise their expectations
in line with the new marketplace, he added.

"We will have to get used to either reduced supply or
reduced deal sizes, with anyone borrowing having to pay up regardless of who
they are."

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