For years, bankers have talked up the possibility of financing projects in the Middle East using the bond markets.
It is attractive for a number of reasons. Primarily, it reduces the reliance on banks to fund the majority of project spending and then hold the loans on their books until they are repaid, which can take up to 25 years.
New Basel 3 banking regulations will make it less attractive for banks to hold loans on their books for that long. That means the sponsor will have to pay more or find somewhere else to get the capital they need.
In 2011, there is the potential for bond issues from new schemes like Qatar’s Barzan gas project
After a successful run in 2010 of getting international bond investors to look at Middle East sovereigns and quasi-sovereign firms, it seems natural that project bonds will be the next step.
A number of obstacles still remain. Most bond investors are loathe to take on the risk that a project will be developed to budget, on schedule, and will start operating as expected. They would prefer to get involved once a project is up and running and has proven cashflows. Clever structuring can get around the problem, but that can be more troublesome than it is worth.
The bond markets can also be fragile, with sentiment frequently upset by geopolitical events, making the ability to successfully access the markets often dependent on right timing and right structuring.
Using the bond market to refinance operational projects that were funded when debt costs were at a peak as a result of the financial crisis is probably a more attractive option than funding greenfield projects.
In 2011, there is the potential for bond issues from new schemes like Qatar’s Barzan gas project and for refinancing existing assets such as Abu Dhabi’s Zayed University.
How successful those deals are will go a long way to shaping what direction the project bond market takes over the next few years.