'No one really knows what the full extent of the effects will be on Middle East projects,' says the director of project finance deals for the power sector at a major international bank. 'We are reassessing the market on a week-by-week basis. I do not expect it to stop any projects getting done, but they will have to pay more to get them away and use a few more banks than they expected to.'

The tightening of the markets is resulting in deals remaining in the market longer than anticipated, as sponsors and financial advisers approach as many banks as possible in an attempt to complete deals without having to change their financial models. However, if difficulties continue, financial advisers and sponsors will be freed to change their expectations of the returns they will get from certain projects.

Five years ago, profit margins on loans were typically about 100 basis points for Middle East projects, but the massive investment drive that is under way and the flood of banks aiming to lend to the Middle East has significantly reduced the spread between the rate at which banks borrow money and the rate at which they lend. Banks have long been unhappy with the downward momentum in margins and have been eager to find a reason to start readdressing the balance.

'I think margins have reached a natural floor now and we will start to see some changes, prompted by what is happening elsewhere in the debt markets,' says Erol Huseyin, energy projects partner at law firm Norton Rose.

The low point, from the perspective of lenders, came in July with the $4,000 million Qatargas 4 project, which was priced at 30 basis points.

The increased cost of project borrowing comes at the same time as the rising cost of raw materials is driving up construction costs in the Gulf, which has contributed to a summer slowdown in project activity. According to MEED projects, the value of deals planned or under way fell from $1.507 trillion on 17 August 2007 to $1.5 trillion on 10 September (see box).

The latest deal to be hit, Qatar Steel Company's (Qasco) $1,300 million refinancing, is struggling to reach completion, with banks complaining about the 60-basis-point margins and the lack of covenants to protect lenders.

At first glance, it is difficultto see how such deals can be linked to the lending to low-income households in the US. While US sub-prime borrowers have bad or non-existent credit ratings, the multi-million-dollar debt being raised in the Middle East is quasi-governmental. Given the booming oil price, there is certainly no shortage of cash to service the borrowings.

Yet there are similarities. The increasing drive to strip out covenants attached to project finance lending is a technique borrowed from the traditional debt markets, where so-called 'covenant-light' deals have been at the heart of the crisis.

The high oil prices and abundant liquidity, coupled with low interest rates, meant that borrowers in the bond market frequently managed to convince lenders that they should lend without the normal safety features or covenants. In a bid to simplify project finance deals, similar techniques were copied in the project finance world.

'When going for a refinancing of a project, you woul