Gulf banks have grown accustomed to a healthy pipeline of syndicated deals in recent years, but 2014 has so far seen a dip in these types of loans and it seems unlikely 2015 will offer richer pickings.

Despite a healthy project pipeline, the volumes of syndicated loans in the Middle East and North Africa (Mena) region has fallen this year, with the $10.6bn-worth of syndicated loans raised in the third quarter down almost 20 per cent on the $13.2bn raised in the same quarter in 2013, according to the UK’s Dealogic. For the first nine months of 2014, $43.9bn-worth of syndicated loans were raised, more than $17bn less than the $51bn-worth of deals closed in the same period in 2013.

There is little sign of large volumes of syndicated deals hitting the market in the Gulf or wider Mena region in 2015. Instead, it is club deals - a structure under which no single bank takes the sole underwriting risk - that are now the prevalent method of raising funds.

Growing popularity

A spate of recent deals underlines the growing popularity of club structures. In November, Indian industrial manufacturer Jindal Saw secured a six-year club facility of AED465m ($126.6m) with a group of Dubai lenders, to finance its regional growth plans. Commercial Bank of Dubai, Commercial Bank International, Emirates NBD and Mashreq bank were the mandated lead arrangers (MLAs) and bookrunners on the transaction, providing the funding to the company’s regional subsidiary.

There’s quite a number of club deals happening; it’s not big underwritings and then syndicating it down

Qatar-based banker

Also in the UAE, the Port of Fujairah is set to tap a club deal for a financing that will support its expansion plans. A AED754m financing facility is being arranged, expected to be closed by the end of 2014, on a club basis through four banks. This will be used by the port to build a breakwater and a jetty for very large crude carriers.

The port raised a syndicated loan to support its expansion in 2008, when it secured a AED900m facility through MLAs National Bank of Fujairah and Commercial Bank of Dubai. That this latest loan is being arranged on a club basis reflects the general shift from syndication to club.

Syndication is still a feature on some of the larger deals. In October, Abu Dhabi Water & Electricity Authority and a consortium led by UK/French GDF Suez International signed a $1.8bn project financing deal in support of the Mirfa independent water and power project, of which $1.2bn of the debt has been raised by a syndication of local and international lenders, including a large number of Japanese banks.

Syndication decrease

Big syndication deals have been thin on the ground in other Gulf states. In July, Bahrain’s Arab Banking Corporation (ABC) launched a syndication of a $500m loan for general funding purposes. The bookrunners and initial MLAs on the ABC transaction were the UK’s HSBC, National Bank of Abu Dhabi, France’s Natixis and Japan’s Sumitomo Mitsui Banking Corporation. Several additional banks had already precommitted to the deal before it was launched into general syndication, giving the wider banking market the chance to participate in the deal.

None of that challenges the sense that the balance is firmly in favour of club deals, rather than syndications. “There’s quite a number of club deals happening; it’s not big underwritings and then syndicating it down,” says one Qatar-based banker. “While there are a few syndication deals done by very large players, like Bank of America, in-country, it’s mostly the club scenarios.”

In Qatar, there is much anticipation over the looming Al-Karaana petrochemicals project financing. There is a lot of discussion in the market as to when the debt package for the $6.5bn olefins and derivatives plant at Ras Laffan, a joint venture of Qatar Petroleum and UK/Dutch Shell Group, will be launched.

“Al-Karaana will be a large project financing with banks asked to submit their bids on the fees and interest rate, and they will be clubbed together in one big syndicate,” says the banker.

Saudi appetite

In Saudi Arabia, there appears to be more robust appetite for syndication, at least compared with bilateral loans. “There are no signs that highlight that the concentration of bilateral deals is increasing,” says Talha Nazar, senior equity analyst at Saudi-based Aljazira Capital.

“We believe syndication of loans will continue, given it also lowers the exposure of a single bank in a single deal.” By the end of 2013, syndicated loans in the kingdom stood at SR237.3bn ($63.2bn), depicting an increase of 35 per cent year-on-year.

In Saudi Arabia at least, there seems to be a preference for sticking to syndication. “There isn’t significantly more syndication than there used to be,” says one Riyadh-based banker. “You do, however, have some borrowers experimenting with various structures.”

Despite the greater appetite among larger domestic banks for bilateral deals, these are more difficult to assemble on the larger $1bn-plus financings. However, if it is a corporate financing for a project with a tenor not greater than five years - particularly if it involves a sovereign-rated group such as Saudi Basic Industries Corporation (Sabic) - then bilateral deals are more feasible, says the banker.

Strong demand

Overall, the demand for credit remains strong across the region, and the reduced syndication levels do not suggest a general slackening in the pace of bank lending. Continued economic growth and public sector spending, coupled with improved consumer and business confidence - particularly in the UAE - will support solid lending growth at an average level of about 10 per cent in 2015, according to a comment on the Mena banking market issued on 5 December by US ratings agency Moody’s Investors Service.

In the GCC, corporate lending will be more robust, on the back of still high government spending, says Konstantinos Kypreos, senior credit officer at Moody’s. “Specific sectors that are seeing an increase vary from country to country, but common themes include spending on infrastructure projects. The recent oil price declines should not adversely affect lending growth as most GCC governments remain committed to diversifying their economies away from the oil sector. However, further declines and/or a prolonged period of low crude prices will affect credit growth, especially in countries with high fiscal breakeven oil prices, such as Bahrain and Oman.”

Regional banks are well-placed to increase their corporate lending exposure. “Mena banks generally have capital ratios well above the minimum regulatory requirements and loan-to-deposit ratios of under 100 per cent, which suggests they have capacity to increase lending,” says Kypreos.

Private sector lending is set to continue at a brisk pace in Saudi Arabia, the largest regional market, as the government will look to maintain spending on infrastructure projects. “Although oil prices have plunged in the past couple of months, we believe the government has enough reserves to continue spending, which in turn will also support corporate lending,” says Aljazira’s Nazar.

Dollar lending

There is little change in the composition of lending, whether dollar or local currency lending. The former is still preferred for the larger deals, says the Qatar banker, with local currency transactions restricted to those with domestic bank clubs. “As soon as you get international banks involved, even if it’s [Dubai’s] Emirates NBD participating in a deal, you will quickly end up on the dollar side,” he says.

Dollar lending is not a challenge for the GCC, although Moody’s warns that outside the Gulf states, widespread use of the dollar represents a form of increased funding and liquidity risk, as a potential shortage of foreign currency can hinder banks’ business activities while central banks do not offer foreign currency liquidity in the event of a banking crisis.

In Saudi Arabia, there was a preference for riyal lending in 2009-10, largely because of the volatility in funding dollar books through the interbank market - especially with the uncertainty that afflicted the large European and US banks at that time. That has now changed and dollar lending is back in the comfort zone.

Borrower preferences are important in determining the currency denomination of loans. Export-oriented players such as petrochemicals plants “can sleep better if the financing is in dollars”, says the Saudi-based banker. “They don’t have to worry about any potential depegging of the riyal. But others are relatively comfortable with riyal/dollar exchange risk.”

On some deals, Saudi banks have been compelled to lend in dollars, for example, in power sector financings, where it is required to fix interest costs for the borrowers. “There’s simply no swap market that runs more than 10 years in riyals, so they have to do it in dollars, which can lead to some bizarre scenarios,” says the banker. “Utilities are paying in dollars, even though they are receiving their revenues in the form of riyals.”

The weaker oil price will doubtless have a bearing on lending activity across the region, although, in the Gulf at least, government infrastructure plans will continue to support credit growth.