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

Raouf Jundi : There are some conversions between the Middle Eastern model and the Malaysian model in Islamic financing, especially with many Middle Eastern banks now acquiring stakes in South East Asian banks. The Malaysian model has been more relaxed, in terms of regulations, but there is some movement towards convergence, which will continue.

IFR: Moving on to the FI market, as we've mentioned financial institu- tions were a huge source of loan volume in the past few years but we've seen only clubs and one syndication this year. What is the future for this market?

Raouf Jundi : There are two things. One argument is that the Russian FI market has remained open, so why is the Middle Eastern not there? Credit quality, in fact, in the Middle East is much better. But many of the banks had already been to market, so maybe the demand wasn't really there and as long as prices have gone up, the borrowers weren't willing to pay up. Now we are seeing a few banks going back into the market. There have been some club deals, there is now the first, test for Bank Muscat in Oman, where the banks clubbed it, signed the deal, advanced the funds and have now followed up with syndication to see what the interest is from the market. That will be a good test, because pricing has clearly gone up, the borrower has accepted it, we are seeing some interest, but the question is how much interest will there be.

Declan McGrath : A lot of FI funding has been done. Whether the FIs got the timing right by accident or design is another question. But a lot of the FIs got their timing right. For example, QNB signed a loan last year at LIBOR plus 19.5bps. However, in six or twelve months' time, when they need to come back to the market, you might see a little bit of resistance. But you will find that they will get done on a club basis. They will try to get the crew of banks in that they want to get in there and then try and see what they can raise in general syndication. Bank Muscat will be a great example to see how this tactic actually pans out when it gets out to the marketplace.

Gilles Franck : The FIs face the same constraints as corporates when it comes to considering the alternatives, which are

the bond markets where the pricing has ballooned out as well, meaning there's little arbitrage between the markets.

Peter Bulbrook : The borrowing was very op- portunistic last year and US$20bn or so was raised. But everybody that participated or had the relationship expected the next course of financing access to be the capital markets. However, that market is not there right now, not at the price they want to issue at.

The dynamic on these deals that have been clubbed so far is interesting and probably underlies why we have not seen increased debt capital market requirement. They are very focused on their benchmark spread, as would be any financial institution, but they have been willing to supplement the all-in requirement for funding, or all-in for lending, by some significant fee packages. Benchmark spread is probably the most sensitive issue for any FI issuer, so that has been a feature in clubbing these situations today.

Rizwan Shaikh : Raouf mentioned that Russia is seeing more issuance in the FI space relative to Middle East. A big factor driving this is that most of the pre-crisis issuance by Middle East FIs was three or five years. Russia, on the other hand, saw mostly shorter dated deals. So a lot of the Russian FIs need to come back to refinance the maturing deals and are having to pay out more. While the margins on some of these loans have been kept artifi- cially low by paying higher fees, the all-in cost has gone up significantly for most financial institutions.

Declan McGrath : The size of the transaction is also key and you are unlikely to see US$2.5bn to US$3bn financial institution loans as new deals will be kept at lower levels.

IFR: How much relationship pull does an FI have?

Grainne Molloy : I think it comes down to price. Some of the FI lenders we speak to say, "We are not going to support our competitor at that price".

Rizwan Shaikh : The relationship groups for FIs differ from corporates in the sense that you have a wide group of correspondent banking relationships spread out thinly, which can be leveraged to get small tickets. Corporate bank groups tend to be smaller but they are able to concentrate their rela-

tionship in terms of cross-sell and therefore can extract bigger tickets. So invariably in corporate deals, you tend to find smaller syndicates compared to FI deals.

Grainne Molloy : Having a good rating helps with expanding the investor universe.

Declan McGrath : Large FIs will have certain relationships with an awful lot of smaller correspondent banks around the world. Protecting these relationships is actually quite important to the people who are involved in correspondent banking. So while it is a much smaller universe to deal with, they go to tremendous lengths to protect their business. But you are right, you won't see them with huge tickets either.

Peter Bulbrook : That's why these deals are being club run. You have your pocket of correspondent banks, very close historic relationships, and you have the complement of other relationships that do their capital and equity structuring. So the club is really what we have seen and I suspect that is the way it will go forward.

Declan McGrath : The rating point is very valid too, because actually in some ways, even though the traditional heresy of one bank lending to another bank - being lending to their competitor - gets taken away if there is a reasonable rating attached to it, it does give some diversifica- tion to their individual types of portfolios.

Peter Bulbrook : International banks looking to do business in the GCC have corresponding banking relationships and strategic relationships for business. This is a very key part of doing business in the Middle East and will always be important.

Raouf Jundi : When the capital markets do come back for these banks, in the longer term their funding will probably depend more on the capital markets than the loan markets. It's just a natural progression.

Declan McGrath : They will also want to make sure that they can get the longer maturities as far as they can, because they wouldn't want to get caught back in the same position they are currently in. With respect to some of these banks, going back to the point I made about evolution, the education, they are a lot smarter than they were, say, five or ten or years ago when we started chasing them in the first place. So

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