According to MEED estimates, there are around $67bn-worth of projects potentially requiring project finance over the next two years. In 2011, just $21bn of projects reached financial close. Bankers expect that this figure represents the maximum capacity of the market.
The gap between the demand and supply of long-term financing for projects is growing. Several large projects from some of the region’s top tier clients will be tapping the market over the next two years, potentially acquiring large amounts of liquidity from other projects.
Saudi Aramco is planning to raise finance for its $20bn Sadara petrochemicals project, Qatar Petroleum (QP) has a $6.4bn petrochemicals project to finance in 2013, and the UAE’s $20bn nuclear power project will look to raise funding later this year.
With the number of banks still interested in long term financing at best unclear (though probably falling), and the capacity of those committed to project finance shrinking, sponsors will have to become much more innovative in their approach to raise funding in the future. So far, government-backed companies like Aramco, QP and Abu Dhabi’s Mubadala, have shown willingness to try and develop the project bond market.
That will be a useful new pool of liquidity if successful. The irony is that while the region’s largest project sponsors are on the one hand trying to help the industry, squeezing pricing on bank loans as low as possible means they are also putting lenders off doing other deals.
If they would agree to pay banks a little extra to make lending more attractive, it would go a long way to boosting the number of lenders active in the sector. On the flip side, banks will have to learn to hold their nerve and refuse to lend to projects if the pricing is too thin. Even if the sponsor is one of the largest in the region.