However, a number of potential landmark deals have not disappeared; they have merely been delayed. The complexity of scheduling issues - and the proven ability of many regional sponsors to have an easy approach to deadlines - makes it difficult to predict accurately the project finance deal flow in the region this year. But, with a handful of deals already done and a clutch more either in the market or fast approaching it, the early signs are that 2004 will more than make up for last year's disappointment. In fact, even a conservative estimate could see some $15,000 million worth of transactions closed by the end of the year.

Significantly, the deal flow will be spread across the region and sectorally diversified. After a quiet 2003, in which the Umm al-Nar independent water and power project (IWPP) was the standout deal, the utilities sector will be making heavy demands this year. Saudi Arabia's Tihama captive power plants have already been financed. Bahrain's Al-Ezzal, Oman's Sohar and Saudi Arabia's Shouaiba IWPPs should reach financial close before year-end, and by then Abu Dhabi's re-thought Taweelah B IWPP could be in play, as could Saudi Arabia's Marafiq.

Demand

Other highlights could include a $2,500 million multi-tranche facility for Dolphin Energy (DEL), a $6,500 million package for Qatargas II and possibly even $600 million for Bahrain Petroleum Company. Add to this some private sector petrochemical deals in Saudi Arabia, some liquefied natural gas (LNG) in Oman and some calcinated coke in Kuwait and the depth of demand becomes apparent.

In fact, this demand for credit will be so heavy as to force changes to the ways in which it is provided. Most important will be the shift towards new liquidity pools. The international banking community will be unwilling - and the Gulf banks unable - to service all the region's project finance needs. Alternatives need to be found and the usual suspects - Islamic structures, project bonds, export credits - will be used with ever-greater urgency. In fact, the package put together for the expansion of Aluminium Bahrain, which includes a conventional debt package, a local bond listing, a metals trading facility, an Islamic tranche and an export credits facility, will come to be regarded as some sort of a template. Not for the speed with which it was assembled - the export credits facility remains uncompleted - but for its multi-tranche profile.

Project sponsors will have to learn about flexibility. Access to non-bank finance can come with strings attached. None of the world's major export credit agencies has difficulties offering cover in the Gulf, and the cost is usually acceptable. However, they can be slow moving and when schedules are tight this can be prohibitive. But the potential capacity is too important to ignore, particularly on large transactions. It is no accident that DEL is aiming to have Japan Bank for International Co-operation (JBIC) provide a base-load tranche. Significantly, some of the major Qatari LNG financings are expected to make much greater use of export credits than has been the norm in the past.

Bond financing too can impose uncomfortable straightjackets. For example, future refinancings can be complex and costly, and brownfield expansions may require the establishment of brand-new project companies. However, the early-March Ras Laffan Liquefied Natural Gas Company (RasGas) bond issue demonstrated just how important paper will be to regional project sponsors. The deal also demonstrated just how a bond deal should be done. Book-building for the $665 million, five-year issue swelled out to over $2,500 million, of which about 80 per cent came from US institutional investors - a whole new species for GCC borrowers. There is demand out there for well-structured, well-priced GCC project bonds. The RasGas experience has opened the door for future issues, particularly refinancings, and others will follow.

The commercial bank market - so long the mainstay of regional deals - is itself in flux. One of the most interesting developments last year was another lurch in the balance of power between the regional and international banks. As figure 1 shows, international banks underwrote 53 per cent of the GCC's total deal volume, reversing the contractions of the last two years. Whether the pattern will be sustained - or whether it was an aberration thrown up by the comparatively small deal flow in 2003 - is open to debate.

However, there are some early signs that international banks are taking a greater interest in deploying balance sheets in the Gulf. Citigroup has been a declining player over the last couple of years - it was barely involved at all last year - but senior executives say it could be lending again this year. Others, such as ABN Amro, Barclays Capital and ING Bank, are also taking a new interest in regional opportunities. Standard Chartered Bank, in particular, is understood to be ambitiously pursuing a policy aiming to establish it as a major force in the region (see page 32).

The timing of this fresh interest could barely be better. Not because the regional banks are losing interest in project finance deals, but because of stretched capacities. In particular, cross-border lending remains limited. The reluctance of Saudi Arabian Monetary Agency (SAMA - central bank) to allow Saudi financial institutions to stray often from their home market is understandable given the sheer weight of domestic project borrowing in the pipeline. But with the 10 Saudi banks accounting for about 40 per cent of the entire region's banking assets and 35 per cent of its equity, SAMA has spoiled the party for the non-Saudi project borrowers. There are few other regional banks - with the notable exception of Gulf International Bank, the doyen of regional structured finance - with the capabilities, balance sheet strength or appetite for regular cross-border forays.

Perhaps the area of greatest tightness is at the long-tenor end of the market. Given asset/liability mismatch problems - problems exacerbated by the immaturity of regional capital markets - regional capacity for 12-year-plus lending is severely constrained. But with the weight of activity in the power and water sector this year - the nature of offtake agreements underpinning most IWPPs effectively enforces a need for long-tenor finance - the seeming renewed interest of international lenders, particularly those with deep pockets, will be welcomed.

Of course, it all has an impact on pricing. Historically, the strong regional liquidity has always had the effect of lowering margins on project financings. The argument has gone that asset-hungry local banks will fix margins while the international banks will set the fees. While regional liquidity continues to be better than robust, some bankers are saying the paradigm might have been broken and margins could drift up this year. They are ever hopeful.

Shifting pattern

The other shifting pattern within regional deals is the attitude shown towards syndication risk and the size of mandated lead arranger (MLA) groups. The past three years has been a steady migration towards what almost end up as expanded club deals, with MLA groups inflated to include up to 15 banks. There has been an element of self-fulfilling prophecy in the interpretation of such transactions: with all the banks interested in the deal signed up at the senior level, it is no surprise that subsequent syndications have been muted affairs.

However, thin recent deal flow has seen some transactions attracting massive interest at general syndication - the Sohar Refinery Company offering is a case in point - and this may give some confidence to those banks and borrowers willing to understand and price syndication risk.

Ultimately, this and all the other trends shaping the regional market will be directed by the deal flow. If it is heavy, as there is every reason to expect, the best evolvers will be best placed. Some things never change.