Despite predictions that 2008 would be a bumper year for Middle East project finance, the indications are that it will turn out to be slower than 2007. That year, the top five advisers raised $44bn for Middle East projects. The previous year, the figure was $58bn.
In the first half of 2008, the biggest deals were the $6bn Saudi Kayan refinery and the $2.3bn Maaden phosphate mine. However, those were technically 2007 deals that lingered on into 2008 because of the difficult market conditions in which they were launched.
The biggest test this year was the Ras Laffan C independent water and power project (IWPP), which spent a long time in the market, from April to August. Eventually, Islamic banks had to step in to close the financing, with Qatar Islamic Bank and Islamic Development bank supplying $250m for the project.
Pricing on the conventional debt in the deal started at 105 basis points (bp) over the London interbank offered rate (Libor), before rising to 160 bp over the debt’s 25-year term. Bankers in the region say that pricing on any new deal is likely to be even higher than this.
“It is remarkable how different the environment has become over the past 12 months,” says one Bahrain-based banker. “Pricing now could be well above 200 bp for any new deals in 2009.”
In a major test for Dubai real estate financing, local property developer Nakheel is seeking to raise $1.4bn through a securitisation deal, against its future income from land sales. Reflecting the changing attitude of bankers to the emirate in the wake of the global financial crisis, the pricing on the deal is expected to be 300 bp above Libor, well in excess of the rate that Nakheel has paid for previous financing deals.
“The markets are effectively closed,” says one syndications banker. “The high price on the debt is not a reflection on Nakheel. No one is doing any deals.”
This situation has been brought about by the retreat of international banks, wounded by losses elsewhere and suffering from a dramatic increase in their cost of funding. Regional banks are also suffering from their inability to raise dollar funding, forcing them to do whatever project funding they can in local currencies.
This reduces the ability of regional banks to participate in cross-border financing, and is often undesirable for developers who have expenses mainly denominated in international currencies.
As the bad news in the financial markets has increased, the problem with the interbank market has evolved from being one in which banks wanted a return above what was being offered to them, to the entire syndications market being viewed as dead while banks digest the full extent of their problems.
The freezing of the syndications market also means that more deals are likely to be done along the lines of a club deal, where a large number of lead arrangers agree to underwrite smaller amounts with the expectation that they hold the debt rather than sell it on.
“Getting any kind of underwriting in the current market is very difficult, and it is far more likely that banks will pursue a large club deal approach like that used on Ras Laffan C,” says one project finance adviser at an international bank.
Some sponsors and financial advisers may be wary of this approach as it can lead to large and unwieldy lead arrangers, which take much longer to form, and in extreme cases, can end up pushing back construction schedules.
Many deals that were expected to be launched this year have now been pushed back into 2009 or even later. “The sentiment among sponsors is that anything that can be delayed should be,” says Ghazali Inam, global head of corporate finance at Arab Bank.
As the crises worsened at the end of 2008, expectations that the project market would pick up again in 2009 quickly evaporated. Most bankers now expect next year will be even slower than 2008 in terms of project finance activity.
For those projects that have to find finance in 2009, among them several schemes to increase power and water provision to cater for the region’s growing population, bankers face a dilemma: do they accept the new financial environment and finance their schemes with debt at margins well above what they had been expecting to pay, or do they find some short-term financing, possibly from an investment arm of the government, and then refinance it when the markets have recovered?
Export credit agencies (ECAs), already a huge source of capital for Middle East development funding, will also be more important in 2009 as they offer large loans, and can provide insurance and guarantees. ECAs like the Japan Bank for International Corporation, which has already invested heavily in Middle East infrastructure, are now vitally important sources of liquidity.
Many bankers are currently looking at whether deals have ECA backing as an indication of whether they will be successful. But most important for any financing in 2009 will be having access to as many different pools of potential liquidity as possible, because the recovery is not expected to come soon.