Bank restructure signal of tough times

06 September 2011

As Deutsche Bank undergoes restructuring, the region faces a harsher climate for project finance

It has never been easy to put together debt packages of several billion dollars to finance the huge projects launched in the Middle East. Since the onset of the global financial crisis in 2008, it has become a whole lot harder.

Not only have banks had to face liquidity issues and an increase in their own cost of funding, new banking regulations will make it far less attractive for lenders to hold a project finance loan on their books for 20 years.

Some banks have stopped being active in project finance while they grapple with these issues and concentrate on more profitable short-term loans.

Many bankers hoped a project bond market would develop that could take some of the pressure off banks to fund projects. Deutsche Bank was one of those, but the bond market has not materialised yet. Meanwhile, the European sovereign debt crisis is becoming more worrying for banks in that region.

Deutsche Bank will not be alone in wondering how it can make the project finance sector work for it. Other international banks will face similar issues, and although the region’s largest clients will always be able to arm-wrestle their banks into giving them long-term money, smaller project sponsors will face a much more difficult time as the pool of available liquidity slowly shrinks.

The core group of banks actively lending on projects around the region, not including local banks who mainly stick to their home markets, has shrunk to about a dozen as a result of the financial crisis. Continued volatility in the West will only put further pressure on those that remain, which will make financing projects in this region even tougher.

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