Project finance departments at banks across the region are being told by senior managers to suspend lending in dollars while the credit crunch drives up the costs of funding in the US currency.
Insiders at banks including Qatar National Bank (QNB), Arab Banking Corporation (ABC), and Gulf International Bank (GIB) say they are receiving instructions from the very top of their organisations to stop lending dollars on deals with long tenors.
Rising interbank lending rates around the world stemming from the credit crunch, coupled with concerns over regional inflation and the stability of the GCC currency pegs, have all pushed up the cost of dollar funding.
In many cases, this makes long-term lending unattractive, especially compared with opportunities in short-term lending of local currencies.
“We have been told from all levels of management that from now on, we are only lending dollars to very select projects or key relationship clients,” says a source at one regional bank.
“That has come right from the top of the bank. Most of the deals that we do pick out do not get past our credit committee now anyway.”
Project finance departments are suffering because long-term dollar lending on projects typically has low margins, meaning that capital can be more lucratively deployed on shorter-term transactions.
The past few months have been very quiet and I expect that to continue into the next three months,” adds the source.
ABC has lost several members of its project finance team over the past few months.
“The project finance team at ABC lost about three or four core people, at least partly because of the slowdown in activity,” says one former banker.
He confirms that the management at ABC had warned the project finance division against lending long-term dollar denominated debt.
However, an ABC spokesman insists that it continues to be active in project finance lending, including long-term dollar deals.
Deals that are being arranged are being done with relatively low participation by local banks.
On the $3.7bn Ras Laffan C independent water and power project (IWPP) in Qatar, which is due to close soon, there are expected to be just four regional banks represented in a 20-strong banking group.
The local banks - Arab Bank, Apicorp, QNB and Qatar Islamic Bank - are participating on a take-and-hold basis, meaning they will retain the debt themselves.
In contrast, the $4.7bn Qatalum aluminium project financing in 2007 involved seven regional banks and was then syndicated out into the wider banking market.
“There was a loss of appetite from regional banks this year compared to previous deals,” says one source close to the Ras Laffan C deal.
However, bankers say the current policy on dollar lending is unlikely to be damaging to the reputation of the banks in the longer term.
“I do not see it as a risk that we might get excluded [from project finance deals] because when the market returns, sponsors will want as many banks as possible to get involved to drive down funding costs,” says one local project finance banker.