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10 | ifr special report | July 2008 MIDDLE EAST LOANS ROUNDTABLE

down in the growth of project financing in the region and that's not because the projects aren't there but rather, contractors and sponsors have reached the natural limit of their capacity. There is a huge volume of project financing to come, but if you look at the volume of project financing as a percentage of total financing, it has actually declined. Traditionally in the Middle East market, project financing was around 70 percent of lending activity. In the last year or two, project finance has accounted for 20 or 30 percent of total lending volume.

Peter Bulbrook : We also haven't seen significant FI issuance this year and we had about $20bn last year. A lot of the M&A either has been talked about but hasn't quite worked, or hasn't happened. There are some deals that have been delayed or have or have taken longer than expected.

Declan McGrath : I think world M&A has also decreased, partly driven by two sides of the table. The target client that somebody may be chasing, because the equity markets have taken a hammering, they may decide they are not prepared to sell at the price that's being offered.

Raouf Jundi : Also if you compare with Russia, the Russian economy is much more diversified, so there is demand from different parts of industries.

Gilles Franck : Russia traditionally relies a lot more on leverage than the Middle East.

Peter Bulbrook : Russia is quite unique, it is a much bigger economy, there are many more corporates that are looking for straight debt, as well as M&A.

Raouf Jundi : The Middle East is very much a hydrocarbon power, which is mostly project financed and there is a slow down in the project market for sure.

IFR: Because of the higher cost, are corporate and project borrowers still going to rely on leverage to the same amount or, given the amount of liquidity that must be in the region are they going to start funding through their own equity?

Peter Bulbrook : Some of the acquisition scenarios we have seen - and have seen suc- cessfully concluded - have been, relatively speaking, highly levered transactions.

These have been from government owned entities that have been able to access bank and capital markets.

There’s no question that

the sovereign wealth funds are interested in diversifying their asset base and they will look to continue to do so.

Declan McGrath : And with significant equity on the table as well.

IFR: Islamic finance is something that has been spoken about for a long time now but it hasn't reached the potential in the loan market that was once promised. How important is that market now?

Peter Bulbrook : The size and aspiration of some of the sovereign wealth funds and some of the other clients we work with mean they are still looking at big opportu- nities and they have realised that the wider financing markets need to see more equity in transactions.

Grainne Molloy : Some of the acquisitions being looked at are going to require not just the bank market but the capital markets as well.

IFR: Are sovereign wealth funds still actively hunting out opportunities?

Declan McGrath : There's no question that the sovereign wealth funds are interested in diversifying their asset base and they will look to continue to do so. It is a little bit more difficult for them at this moment in time. The pricing that would be required, or the pricing that they would be prepared to pay in terms of a premium, is not as much as the people who they are targeting would want to see in a lot of cases.

Peter Bulbrook : Sovereigns or their investment vehicles are strong in the traditional sectors such as hydrocarbons and other industrials and sectors where they already own businesses. That's where they are looking in terms of acquisition opportunities around the globe. So that is, businesses that make sense and can complement the group or the strength of the corporate activity they already have.

Rizwan Shaikh : The Islamic market volumes are healthy but they may be somewhat misleading as to the true size of Islamic content. There are a lot of deals structured Islamically as a way to tap into marginal liquidity. So you have to see through those volumes and see how much of the deal size is real, pure Islamic content and it is not as large. When doing big deals, every dollar of marginal liquidity counts, so by structuring a deal Islamically, if you can tap into incremental liquidity, then why not? While the documentation is a little bit more complex, it doesn't cost anything in terms of pricing. However, the market has increased.

We've seen new Islamic institutions coming up, so the proportion of Islamic placed paper has increased. While the documenta- tion is a little bit more complex, it doesn't cost anything in terms of differential and pricing or anything else to incorporate that. So where you have some capacity concerns you would rather structure something Islamically, because all the conventional banks are now so used to these structures they don't really care to a large extent, except for some smaller investors in Asia who may have some concerns.

Raouf Jundi : It's definitely a growing market, but expectations were perhaps unrealistic. It was never going to become 50 percent of the world market, because clearly there's more money globally in the conventional banks rather than the Islamic banks.

Declan McGrath : That's very fair. The ex- pectations that were suggested at the time that it first came into vogue were totally and completely unrealistic. However, the sukuk market is certainly thriving. The loan market is almost certainly increasing in terms of size and, as has been said, if getting that last $150m to $200m of liquidity may very well be the piece you need to complete your deal successfully, people will chase it.

IFR: Do the clients care whether a deal is structured Islamically or not?

Peter Bulbrook : That's probably the key point, certain clients will insist or require

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