Regional loan market collapses to 2004 levels

19 January 2012

Global problems weigh on regional syndication volumes

The volume of loan syndications in the GCC fell to their lowest level since 2004 last year and the market is not expected to improve in 2012, according to bankers in the region.

Only $32bn was raised through the loan market in 2011, compared with $53bn last year. Syndicated loan activity has fallen dramatically since 2007 when it peaked at $123bn.

Dubai and its state-owned companies accounted for a large portion of the boom in lending in the region before 2007. However, since then several of the government’s companies have been forced into restructuring their debts, most significantly Dubai World, which shocked international investors by announcing that it needed to restructure $25bn of debt in November 2009. As Dubai focuses on refinancing and reducing its debt burden, the demand for loans is falling.

“Borrowers know that conditions are much tougher and the amounts available are not what they were,” says John McWall, head of syndications at Bahrain’s Arab Banking Corporation. “Plus with a number of European banks deleveraging, the capacity of the market is reduced.”

Many European banks have been busy selling off regional syndicated loans, along with other assets, as part of their attempts to boost liquidity in the face of a mounting European sovereign debt crisis. European banks had played a major part in the syndicated loans market over the past few years.

“Market fatigue is not confined to Europe anymore and some international banks are retrenching out of the region,” says Steve Perry, head of syndications at the UK’s Standard Chartered. “In addition, companies are holding cash and are not necessarily looking to raise money to make acquisitions or expand, there is a more cautious approach to life.”

The dominant theme of the loan markets this year is expected to be refinancings, rather companies raising new money. “This will be a tough year as there is a lot of refinancing to be done in the loan and bond markets,” says one loans banker at a regional bank.

Dubai has around $11bn of debt maturing in 2012, according to ratings agency Moody’s Investors Service. The most problematic of these are expected to be a $1.25bn sukuk (Islamic bond) issued by DIFC Investments that is due to be repaid in June, and a $2bn sukuk issued by the Jebel Ali Free Zone (Jafza) that matures in November. Other facilities are expected to be “easily dealt with be through refinancing or part refinancing”, says Perry.

While the loan markets are tight, many borrowers have turned to the bond or sukuk market to raise money. That is expected to continue. “With the pressure on banks, some borrowers have turned to the capital markets, but that tends to be top tier names and financial institutions, which have strong government support,” says the loans banker.

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