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

on a similar basis to the PPP/PFI model adopted in Europe. Although a slow growth market segment, this remains nonetheless a significant area (as the infra- structure lags behind the development of the economies) requiring substantial financing.

Declan McGrath : If you had gone to a project financing group, sponsor, bank, prior to, say, August of last year and you mentioned the word "flex" you would have been thrown out of the room. Now you will not see a being deal done on the project financing side without it being discussed. It's there, and again, for all the same reasons that we are in the current markets that we are operating in.

Declan McGrath,RBS

ture, it is trying to do all the right things in some of the regions outside of the major western world, although, having said that, the US for example has US$500bn worth of infrastructure projects to do over the next ten to twelve years. But within the region the projects have got bigger and now that we are in this current so-called crisis, people are not prepared to put their money on the table for that kind of tenor at those kinds of returns. There has got to be something else that's going to make it worthwhile. I do think that some of the more significant projects will get done, they will have more equity coming into them, they will have more sponsorship support where they are of significance, whether it is roads, whether it is liquid natural gas or whether it's oil-based. You will see them get done, but it will be much more difficult to get people to be willing to provide 20-year money even for a US$10m, US$15m or US$20m ticket unless the pricing increases significantly.

Grainne Molloy : The Project Finance market will continue to play an important role in the growth of the GCC. Traditionally project finance has centered on oil and gas and petrochemical projects. This is now being extended to infrastruc- ture. Banks continue to have appetite to lend the long tenors required by such projects, however, not unlike other sectors, project finance is experiencing a change in funding parameters.

Gilles Franck : It is interesting that the Qatari's in particular in the last few years

had already tried to address a potential disconnect between the size of the projects and the available money in the bank market. They added capital markets tranches to bank tranches, to some extent arbitraging pricing differentials. Obviously what they had not foreseen is that the bond market might become so expensive and so, for now, the dual tranche structures have been dropped again. But the capital markets will definitely be there for project finance, at what institutional investors consider to be the right price.

Rizwan Shaikh : Infrastructure is in vogue these days with alternative investors e.g. infrastructure funds, multilaterals and other institutional investors, who are going to become increasing important for financing infrastructure projects. Many in- frastructure projects, such as airports, used to be financed in the securitisation market which is now pretty much shut. This may lead to the re-emergence of the mini-perm structure, where banks provide five or seven year financing, with the expectation that capital markets and other sources will return in time for refinancing or de- leveraging to some extent. We used to see mini-perm structures some time back, although they have more or less disappeared in the last few years.

Grainne Molloy : Infrastructure projects in the Middle East have tended to be funded directly by the government. There is appetite from the bank market to lend to such projects as has been demonstrated by recent deals which have been structured

Raouf Jundi : For a project, you could be sitting on the underwriting for months and months and months, and the market is changing so quickly so flex has become much more important. The banks prefer not to have a cap on flex and if there is a cap it must be quite a wide cap.

Declan McGrath : It must be a big, wide cap.

Grainne Molloy : Due to the nature of the bidding process - arrangers are often required to hard underwrite PF deals, making the requirement for flex all the more important.

Rizwan Shaikh : And with 20-year deals, if you get pricing wrong by a few basis points, you can be under water quickly. So while some banks may contemplate limited flex in short-term deals, longer dated project financings will be much more challenging.

Declan McGrath : The other interesting point is that, for a period of time up until the present crisis started, the majority of people who were doing project financing transactions were banks at the top of the table that were prepared to underwrite project financing deals. They were prepared to put reasonable amounts of money on the table to take large holds as they were building up their own asset portfolio. Of course that's fine if you think that you can fund and you can offset the funding costs that you are getting paid out in the open marketplace, but of course that's not the case today. Most of us around the table are paying an awful lot more for our funding anyway, depending on which day of the week it is,

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