Saudi banks support project finance sector

08 February 2011

Saudi Arabia’s project finance sector is booming as local lenders, awash with liquidity, rush to back government-sponsored projects

Banking key fact

Saudi Arabia accounted for about 70 per cent of the total project finance raised in the GCC and Egypt in 2010

Source: MEED

Speak to any project finance adviser and they will say the key to getting deals done is going to the market early and approaching as many sources of funding as possible. Projects in Saudi Arabia can largely ignore that advice.

Instead, schemes in the largest economy of the GCC are attracting most of their financing from local sources and generally in the local currency. The availability of cheap riyal loans has been a relief, while international sources of funding are more expensive, although most sponsors would prefer dollars.

A cautious central bank, deep deposits and strong government-linked project sponsors have resulted in a rapid decline in the margin paid on loans for Saudi project finance deals. This is a clear sign that local lenders see the loans they are making as fairly safe investments.

Financing upturn in Saudi Arabia

In 2010, several large deals were completed in Saudi Arabia, including the $14bn Jubail refinery, the Saudi Arabian Mining Corporation (Maaden) aluminium project, which secured financing for its first stage, and the Riyadh PP11 power scheme. The total financing raised in the kingdom during 2010 was $23.6bn, about 70 per cent of the combined $33.7bn raised in the GCC and Egypt.

Saudi private sector credit growth (percentage)
Source: Sama

Despite being the biggest project finance market in the region, some in the industry had hoped to see more deals completed.

“We thought it would be bigger,” says one Saudi banker. “If Aramco’s Yanbu refinery was financed it would have been over $30bn.” That deal was withdrawn from the market after US oil major ConocoPhillips walked out on the project in April 2010.

The $23.6bn in financing represents a significant upturn from 2009, when just the $2.5bn Rabigh power project reached financial close. The slowdown was the combined result of defaults at two Saudi corporates, Saad Group and AH al-Gosaibi & Brothers, the impact of the global financial crisis and projects taking longer to get financing than expected.

International banks in particular were hard hit. “In 2009, it was very difficult asking credit committees in London or Paris to approve new loans for projects in Saudi Arabia, when they were looking at massive losses on existing loans in the country,” says a project finance banker at an international bank.

Banks in Saudi Arabia will continue to lend in riyals. They will do some dollar lending … but charge a huge premium

Head of project finance at a Riyadh-based bank

The disappointing 2009, during which loan growth across all sectors in local banks was flat, laid the groundwork for a strong return in 2010. Cautious banks had built up deposits from a year of not lending and the pressure was on to rebuild profits that had been eroded through the lack of loan growth and high provisioning levels.

This resulted in tough competition among banks to lend, which in turn drove pricing down. Other factors have also served to revitalise the kingdom’s project finance sector.

State investment to boost the economy is leaving less opportunity for bank lending. Government lenders, such as the Saudi Industrial Development Fund and the Public Investment Fund (PIF), have increased the amount they can lend to projects. The PIF can now lend more than $1bn to a single project.

“Because the government is providing large upfront payments to contractors and the private sector is still very cautious, the opportunities to lend are actually quite few,” says the chief executive officer of one local bank.

Competitive project finance market in Saudi Arabia

“With oil at around $100 a barrel, there is a lot of confidence in the Saudi banks, but there is also a scarcity of deals because they now do a lot less lending to family groups and corporates,” says the head of project finance at one international bank. “That has made it really competitive. As an adviser on a Saudi deal, it is great because you have a few banks that are willing to come into a deal with huge ticket sizes and at low margins.”

Such a position is in contrast to the rest of the region. Elsewhere, banks were generally allowed to lend more than they had available in deposits during the boom times, as a result they are still trying to rebuild their deposit base before they can start lending again.

In 2011, the trend for Saudi banks to fight over deals is set to continue. Local banks remain awash with local currency liquidity.

“Banks in Saudi Arabia will continue to prefer to lend in riyals,” says the head of project finance at one Riyadh-based bank. “They will do some dollar lending for their top clients, but they will charge a huge premium for it.”

Some banks have already moved to start raising dollar funding, typically through the international bond markets, to help them offer clients both Saudi riyal and dollar loans. There are plenty of schemes this could be lent to.

Projects due to be launched in the kingdom during the next 12 months include phase 2 of the Maaden aluminium project, the Qurayyah power project, Medina airport public-private partnership and several petrochemicals schemes. In total, about $10bn is due to be raised for these projects alone, although bankers expect the total amount in 2011 will be larger and could even exceed 2010 levels.

“There is a lot of demand for new assets and with the effects of the financial crisis now passing and the oil price in a good place, everything is lining up for us to have a very busy year,” says a Riyadh-based project finance banker.

Just how much will be raised is unclear, as is whether the Saudi market will continue to dominate the region’s project finance sector.

Saudi Arabia reliance

Some analysts are now questioning whether the heat in the market will ultimately be a good thing for the Saudi banking sector. Already the heads of several local banks are worrying that pricing has fallen too low.

The Qurayyah power project is expected to be financed by 20-year loans at below 150 basis points above the London interbank offered rate (Libor). Some international banks have baulked at this, leaving the deal to be mainly done by local banks.

The Medina airport project is another scheme expected to rely on local banks as several international lenders have decided against supporting the scheme.

Whether project sponsors try to push banks further by trying for even lower pricing will be a key question for 2011. Most bankers feel that after 2010, when a lot of pressure was applied by clients, such as Saudi Aramco, to make banks lend at as low a margin as possible, there will have to be some stabilisation in pricing this year. That could lead to some tough negotiations over the coming months as sponsors try and continue to put pressure on lenders to keep margins low.

Some Saudi banks are also starting to look at putting their resources to work elsewhere in the region, especially given that lending rates are often higher in other countries. Riyadh-based Samba Financial Group is among those leading this expansion and is looking at opportunities in the UAE and Qatar. Other banks say they are also considering lending outside the kingdom. It is a sign of the strength of Saudi banks that they are now looking at regional expansion.

Momentum will build up quickly this year, starting with the launch of the second phase of the Maaden aluminium project in the first quarter. That will be followed by bids being submitted for the Qurayyah power project. Banks are already lining up for that project and the Medina airport scheme.

Schemes in the pipeline for 2011 also show the increasing diversification of the project finance sector in Saudi Arabia. Projects are under way in the metals, real estate and transport sectors. This will allow banks to gain exposure to a diverse set of assets, rather than being concentrated in the power and hydrocarbons sectors, as has been the case in the past.

Large banks dominate Saudi projects market

A few large banks are expected to continue to dominate the Saudi projects market. National Commercial Bank, Samba Financial Group, Banque Saudi Fransi and Riyad Bank have shown themselves to have a ferocious appetite for new deals. Sources at those banks say this is likely to continue in 2011. The size of the loans each of those banks is able to make to a single project has made them an essential part of the kingdom’s project finance landscape. Other banks often find it difficult to compete with the terms those giants can offer.

The amount of financing required by projects in Saudi Arabia means they will have to get involved in some of the deals going through the market over the next year. That may coincide with a re-entry of international banks as they recover from the losses made on Saad Group and AH al-Gosaibi & Brothers.

After being able to rely on a relatively small pool of liquidity sources, the return of international banks and dollar lending will be a big relief to project sponsors, who generally prefer to borrow in the dollar. But they will continue to face a tough choice between cheap local funding and more expensive international loans.

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