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8 | ifr special report | July 2008 MIDDLE EAST LOANS ROUNDTABLE “

Clients have to be aware, and we see many that are, that successful deals come where clients have embraced their relationship banks,

given them the right additional ancillary business and given the right income flows that support capital commitment.

going to come at a cost and to the extent issuers get practical about accessing the capital markets, it will help reduce pressure on the bank market.

Raouf Jundi : The same borrowers are also in a phase of growth. So unless they can offload the bank paper into capital markets, they will not be able to increase their overall funding.

Rizwan Shaikh : Banks are becoming a lot savvier in structuring bridges. You don't get bridges approved today without having serious discussions with borrowers on take-out strategies and incentives for going to markets. You will see a lot more protection and bells and whistles on these bridges which ensure that banks are not left holding them at a submarket level.

Peter Bulbrook : The opportunity is there, we have seen the wider debt capital markets within GCC grow tremendously over the last three to five years, so that issuers can access not just the traditional loan markets, they can issue in Islamic loan form, in the conventional capital markets, sukuks or convertible. All the tools are there for clients to use and they have been used successfully before.

Declan McGrath : In a lot of the cases where you have these bridges, the get out will be if they don't issue in the bond market, then there is an increased price to pay of significance and a structural change if that's what's required in order to get it re- structured. Even for project and export finance type transactions that may be planning bond issues, you can get your full flex-pricing, or structural pricing in order to be able to take it out at the end of the period. We have actually seen a couple of situations like that.

Peter Bulbrook : Capital comes at a cost. So when banks book loan positions and put them through portfolio, the immediate measure or relative value play is, for example, the CDS. If you look at the CDS plays in some of the GCC names, it is incredibly high, considering where they issue in the bond market.

So if we just continue to keep soaking the loan market with exposure and capital, more and more we have seen the price getting near to the CDS levels or in fact the price they would issue in the capital markets anyway.

Gilles Franck : The bond space has ballooned because there was so much foreign partici- pation in those bonds in the last two or three years and everyone thought, "Well, there's always going to be a backstop in the Middle East if I need to sell", and no-one ever thought that there might be a dollar shortage in the Middle East; suddenly there was no-one to sell these bonds to. So it has nothing to do with credit or anything. Now the loan market looks at those references as well and says, "Hang on, why should I go so much below that?" So there is a balance to be found. I am pretty confident that the capital markets will be there again for refi- nancings at levels that will be market levels and the question is who is going to take the first step?

IFR: Is that to suggest that the bond and loan market pricing is converging?

Peter Bulbrook : To a degree, but not entirely and there is not an exact measure between loan and capital market pricing anyway.

Raouf Jundi : It doesn't just apply to the Middle East and even Europe, where the banks - or the markets - have been saying that they will converge. They have never really converged. At one time either one is high or the other is high depending on where the liquidity is coming from.

Rizwan Shaikh : Convergence will depend on size. If you can get deals done within your relationship group, you can be signifi- cantly inside the capital market pricing. The moment you need to go outside your core group, you will see a lot more convergence between loan and bond pricing.

Peter Bulbrook : Across any loan market across the globe the relationship is the key to achieving subscribed deals and

accessing capital from banks. I think it's a point that in the GCC we are in the infancy, in terms of loan market issuance and relationship development, particularly with the international banks. Clients have been issuing in a corporate context over the last two or three years in size but not previous to that. Clients have to be aware, and we see many that are, that successful deals come where clients have embraced their relationship banks, given them the right additional ancillary business and given the right income flows that support capital commitment.

Grainne Molloy : In the past, we have seen deals which although aggressively priced and structured, were successfully placed in the market on the strength of relationship. But as deals are increasing in size, due to Middle East corporates becoming more acquisitive and reflecting the growth of the GCC economies, there isn't sufficient ancillary business to go around. So while relationship continues to be a key element in the successful distribution of deals, price and structure are equally important; it's not just the one without the other.

Declan McGrath : The GCC is an evolving market, and borrowers are learning. There is an educational process that needs to go on both sides of the table and they have learned. Even the local GCC banks themselves, they are not hiring ex-pats from the foreign banks for no reason, they are doing it for all the right reasons and they are putting them in senior positions within those banks for all the right reasons.

IFR: Why has there not been a sort of feeding frenzy in the Middle East as there has been in Russia? Why does the Middle East look relatively quiet compared with Russia?

Rizwan Shaikh : It is really M&A driven. We've seen a drop off in both inbound and outbound M&A activity in the Middle East in the last six months, whereas there has been a lot of M&A activity in Russia which has driven volumes.

Grainne Molloy : A percentage of it is project finance related. We've seen a slow

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