The liquidity crisis engulfing the global money markets has triggered a collapse in the region’s project finance sector, with the number of banks actively pursuing deals plummeting in recent months.
Industry sources tell MEED that just 12 firms are actively seeking deals as dollar liquidity dries up and the appetite for long-term funding diminishes, down from more than 45 two years ago.
Both regional and international banks are increasingly risk-averse as international financial markets seize up in the wake of the collapse of US investment bank Lehman Brothers and the nationalisation of insurance firm American International Group (AIG).
The situation marks a dramatic turnaround for the region. As recently as 2006, 45 banks were involved in the 20 largest deals.
The situation is in marked contrast to what was happening 18 months ago when the number of banks eager to get in on deals in the Middle East was so large that they were bidding prices down to as low as 50 basis points above the London interbank offered rate (Libor).
Any deals that do manage to gain bank support now are expected to cost sponsors at least 150 basis points over Libor.
Among the banks that are still seeking to finance projects in the region are international players such as the HSBC and BNP Paribas, and regional banks such as National Bank of Abu Dhabi and Arab Bank. Smaller international banks such as BayernLB and Standard Chartered remain committed to financing projects in the region, but are finding it increasingly difficult to fund long-term dollar-denominated debt.
“We looked at the number of banks still active in the project finance market for this deal and found about eight to 10 banks still have some appetite for long-term project debt,” says a source at one of the banks that is working on the Shuweihat 2 (S2) independent water and power project (IWPP) in the UAE. “It is a complete turn-around from 18 months ago.”
Another banker at an inter-national bank in Bahrain puts the number of banks still active in the market at about a dozen.
Three-month dollar interbank lending rates were at 3.21 per cent on 23 September, well above the 2 per cent US Federal Reserve target rate, indicating how expensive it is becoming for banks to source dollars to fund projects.
The S2 project, which is being developed by Belgium’s Suez Energy International, is one of the closest to approaching the market, but a syndications source at one of the underwriting banks says the deal may not go to the market until conditions improve.
“I do not know when it will be launched,” says the source. “We are speaking to Suez because it is keen to get the project financed this year, but we just do not see a market for it at the moment.”
The three underwriting banks on the deal are Calyon, Natixis and BayernLB.
Among the other projects seeking funding, the Shadeed Steel project in Oman, which is being developed by Abu Dhabi’s Al-Ghaith Holdings, is understood to have been restructured by its financial adviser, National Bank of Abu Dhabi.
Bankers close to the deal say that, once issues of tenor and pricing have been addressed, the project should succeed in getting financing because of its relatively small size. NBAD is seeking to raise about $500m in debt (MEED 8:8:08).
Ramzi al-Sewaidi, head of investments for Bahrain’s First Energy Bank, is also working on structuring a deal for the purchase of two oil drilling rigs, which will cost $400m. He expects that by keeping the tenor short and offering banks a good return on their investment, it will still be possible to get financial support.
“It will be difficult to get any deals with a tenor of more than 10 years financed in the current market,” he says.
Former players in the project finance market such as Gulf International Bank (GIB) and Arab Banking Corporation (ABC) are regarded by their contemporaries as having left the market. Representatives for both banks say they remain interested in the sector, but insiders concede that though they are looking at deals, the current terms and tenors mean it is unlikely they will be able to do any unless terms improve.
“We have had it right from the top not to do any long-term dollar financing,” says another banker at a major Qatari institution.
Even some of the region’s international banks are now focusing on project advisory work, which enables them to earn fees without affecting their balance sheets.
With more than $20bn worth of projects due to seek financing in the next three to four months, bankers are expressing concerns over how this will be achieved.
“The days of being able to send an information memorandum to banks and appetite being so strong you could get them to reply within four weeks are definitely over,” says the London-based project financier. “I struggle to see how any new deals will get done before the end of the year.”