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24| pfi | Middle East Report 2009 Loan market

After the gold rush W

ith project financing and FI domi- nant until the early part of the 2000s, the Middle East was largely a back- water loan market. This changed dra- matically as the region's largely

state-backed corporates used debt to gear up their equi- ty investments in what turned out to be something of a global shopping spree. And the growth rate was dramatic. From signing 54 loans for just under US$14bn in 2000, at the height of the debt boom in 2007 Middle East enti- ties signed 162 loans worth close to US$130bn. Even as global markets slumped in 2008, loans worth nearly US$99bn were signed in the year. However, hopes that Middle East's vast oil wealth could provide a base to enable the region's economies to decouple from the economic carnage spreading through the West were soon to prove forlorn. And just as the ascent of the market was rapid, so was its halt this year, with Middle East entities signing just 11 loans worth about US$7.7bn in the first four months of 2009. The reasons for the sudden halt in activity were three- fold. First, Gulf banks themselves were soon implicated in the credit crisis through their exposure to sub-prime instruments and failed institutions; second, a number of high-profile defaults in Kuwait led to wider concerns over transparency in the country; and, most seriously, third, the view that Dubai-linked entities had over-borrowed led previously keen lenders to reconsider their commit- ment to the state and the wider region.

That Dubai was the catalyst of lender concern in the Middle East is in retrospect not surprising. Dubai Inc's acquisition spree resulted in Emirate-linked entities owning outright, or stakes in, companies as diverse as P&O, Madame Tussauds and Nasdaq. A frenzy of largely unco-ordinated borrowing funded this binge, leaving Dubai with a debt pile that reached US$70bn at the end of 2008, translating into one the highest proportions of

At the start of the year, the boom that had turned the

Middle East into one of the world’s hottest loan markets looked like it was set to end in a spectacular bust. However, government support for some the region’s

most indebted borrowers has helped to steady senti- ment, and there is hope that the market can now recover some of its previous poise. By David Cox .

foreign debt to GDP in the developed world. Fears over Dubai's debt load were further compounded as the Emi- rate does not have the same resource wealth as other Gulf states. After a US$2.5bn refinancing for Borse Dubai that only managed to close fully subscribed after state inter- vention, Dubai started to soothe the market's nerves with the announcement that the UAE Central Bank had sub- scribed to half of a US$20bn bond programme. While the move was not seen as a panacea for all the Emirate's woes, bankers said that as a public acknowledgement of Dubai's funding issues, the federation's public display of support provided a floor from which market sentiment could once again rebuild.

The move also meant that Dubai had more than enough leeway to cover its estimated refinancing require- ment of US$11bn in 2009. Borse Dubai's difficulties had showed the tough task that once feted borrowers now faced in getting banks to maintain their lending com- mitments.

In syndication Borse Dubai raised about US$1.2bn from the market for the refinancing, leaving the Invest- ment Corporation of Dubai to step in and provide the shortfall through two local banks. Although the facility missed its target by a wide mark, it did show that lenders were still willing to support the market – albeit in smaller volumes than previously. The per- formance of a loan for Dubai Civil Aviation Authority later confirmed this view when it closed the refinancing of a US$1bn ijara facility at US$635m in April. Here, as with the Borse, the remainder was made up by the government. However, with the state successfully stabilising the market, lenders showed they were willing to support top tier borrowers in size, with a US$2.2bn loan for the Dubai Electricity & Water Authority (DEWA) key. The facil- ity was a notable success, raising more than the launch

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