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Middle East Report 2009| pfi| 25

The success of the DEWA loan was very helpful in improving moods

amount in a market where other Dubai borrowers had missed their targets. Indeed, the facility offered a sign- post to the likely direction of the loan market through- out 2009.

"Market sentiment has improved slightly throughout the year," said Steve Perry, regional head of syndication, Middle East and Pakistan, at Standard Chartered. "The suc- cess of DEWA's loan was very helpful in improving the mood and showed the market's propensity towards safe- haven credits with stable cashflows and business mod- els," he added. "As a result, I expect industries such as telecoms and utilities to be the focus of much activity this year."

DEWA also provided a new pricing point. The facility paid a margin of 300bp, which on a wider comparative basis looks competitive given that Dubai CDS was yield- ing around 565bp at the time of signing in April. Dubai is not rated, but state-owned global ports operator DP Word is rated A/A1.

On a wider market basis, European Single A rated credits are paying margins in the 150bp range, meaning Dubai is paying a very hefty country premium. As such, given the scale of this premium, which undoubted reflects in part fears about Dubai, bankers doubt whether DEWA will provide the pricing benchmark for the rest of the year. That said, it demonstrates that the market will provide support for decent credits.

While most agree that the pricing benchmark for the year's activity has yet to appear, few expect it to emerge from Dubai. After dominating so much activity in the region, the Emirate is likely now to take a back seat. While the bond programme means lenders are more relaxed over credit quality, there is still a clamour for more clarity over where, or if, the money has been deployed and which borrowers have been, or are set to be, supported. Worries over transparency are also likely to mean that Kuwait will continue to be a very difficult market. These concerns follow last year's default by Global Investment House and Investment Dar's ongoing talks about restructuring its debt load. While these discussions continue, bankers said they had highlighted some of the difficulties of lending in Kuwait, where companies are allowed to release less information than those in other Gulf states, and then only in Arabic.

"Until there is a resolution on these restructurings, interest in Kuwait is likely to be limited to quasi- sovereign or intra-regional names such as Zain, the mobile operator," said one senior banker. In this sit- uation, bankers expect most of the opportunities to come from the triumvirate of Abu Dhabi, Qatar and Saudi Arabia. All three have the benefit of strong domes- tic commodity bases and relatively modest borrowing records.

Already one the year's landmark facilities is being put together as the Bank of Tokyo-Mitsubishi UFJ, HSBC and Santander are co-ordinating a US$5bn loan for IPIC. Although US$5bn is a hefty sum in the current market, IPIC's status as the holding company for Abu Dhabi's oil interests makes it a fine credit whatever the wider eco- nomic climate. Indeed, IPIC's impeccable credentials are the type that banks will be looking for when loosening their purse strings.

"Sentiment is improving and while there have yet to

be any landmark deals completed to test this so far this year, there are strong signs of returning appetite," said Raouf Jundi, head of origination, Middle East and Africa, at Bank of Tokyo-Mitsubishi UFJ. "There is a strong flight to quality inasmuch as lenders are looking for borrow- ers that are either quasi-sovereign or have a strong busi- ness profile with real income and growth potential," he added.

That said, few expect a return of large-scale syndications

any time soon, with clubs expected to dominate. With the partial exception of Saudi Banks, few regional lenders are willing to lend outside their home country and cautious international lenders show little desire to expand their relationship client bases.

As in the wider EMEA region, to lend, banks require both a strategic relationship rationale as well as signifi- cant pricing. This means Middle Eastern borrowers – in keeping with the new European environment – must pro- vide concrete evidence of ancillary business opportuni- ties and how they intend to share them among their group before most lenders will agree to commit. In a mar- ket that the cream of international banking sought to court until little less than a year ago, for many Middle East- ern borrowers this new attitude is likely to come as something of a culture shock. Moreover, constraints on banks' balance sheets and their continuing deleveraging means the bond market is expected to become increasingly important. Successful sovereign sales for Abu Dhabi and Qatar have been fol- lowed by a US$1.75bn bond from Mubadala, making it the first Gulf-based corporate to issue since the beginning of the credit crisis. The reopening of the bond markets is positive for the loan market as it offers an alternative take-out route given that demand among retail banks remains patchy at best.

Whether this means that the market will be able to move beyond club-style facilities to formal underwritings remains an open question. When asked, bankers say that while they are prepared to underwrite, they also require downside protection through high pricing and significant flex. This may be a paradigmatic shift from the easy days of the credit boom, but with depressed equity valuations meaning there are opportunities for corporate expansion globally, the potential for well-run borrowers to use the market for their long-term benefit is real.

Few expect a return of large scale syndications any time soon, with clubs expected to dominate.

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