For the first time in a decade, Gulf bankers are seriously considering invoking escape clauses in their contracts so they can walk away from underwriting deals they have already agreed.
France’s Calyon has entered into talks with sponsors of two projects in Abu Dhabi, which could yet lead to the bank using the material adverse change clauses in its contracts.
Calyon’s difficulties stem from something that is affecting every financial institution in the region.
The London interbank offered rate (Libor), long used as a benchmark for the cost of bank borrowing, is now considered a poor reflection of the true cost of debt.
This makes it hard for banks to price the money they lend to others, and makes syndicating debt extremely difficult.
As a result, everyone in the banking market is talking about market disruption and material adverse change clauses, which have not been heard of in the region since Barclays Capital came close to invoking them on the financing for the $650m Nodco refinery in Qatar in 1998.
That followed a Russian financial crisis, but the current market turmoil is far worse. Privately, bankers are saying that if the current chaos does not constitute a market disruption, nothing will.
The fear is that if market sentiment continues to sour, more banks will look at the risks on their balance sheets and the rising cost of funding, and simply decide to walk away from commitments they have made.
A failure to find some kind of solution to these issues will make a nervous market even more risk averse.
This will be a test case in how government authorities such as the Abu Dhabi Water & Electricity Authority (Adwea) handle financing problems with their projects, and whether they will be prepared to step in to fill any shortfalls.
Given the importance of these projects, the financing will have to come from somewhere.