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July 2008 | ifr special report | 3 MIDDLE EAST LOANS ROUNDTABLE

Middle East Loans roundtable

IFR: In spite of the wider difficult market, Middle Eastern corporate loan volumes appear to have held up relatively well. How does the panel rate the health of the market?

Raouf Jundi, Bank of Tokyo-Mitsubishi UFJ (BTMU): Driven by the growth of regional economies, the loan market in the Middle East is booming. There is strong liquidity but obviously at a different price, and coming perhaps from different areas. Europeans are still providing the bulk of the liquidity and the regional banks are happy to come in only if there is a local tranche. Occasionally local banks will lend in dollars, but clearly the cost of dollar funds for them is too high, but for local currency - dirham or Saudi riyal, etc - they can accept lower returns which are comparable to what the dollar returns are for European Banks.

Grainne Molloy, HSBC : There is significant liquidity for the right Middle Eastern names at the right price. Middle East banks themselves have been relatively unscathed by the subprime crisis, with a couple of exceptions, but the debt market has not been immune from the fallout of that crisis. Increasing funding costs of banks, combined with difficulty in accessing liquidity, has led to greater selectivity amongst the banks which in turn has translated into increased costs for borrowers.

From a currency perspective, borrowers

have to be more flexible. Certainly there is dollar liquidity as we've demonstrated on a number of transactions – notably with Borse Dubai and its acquisition of OMX. That deal totaled roughly US$5.8 bn and was highly successful, securing an oversub- scription in syndication which managed to tap various sources of liquidity. European banks have contributed substantially to liquidity in general and, on that transaction, roughly 40% came from European banks. Interestingly, roughly 40% also came from Asian banks who are playing an increasing role in the Middle East. Similar to other banks, however, Asian banks are also beginning to refocus on their own markets, and are therefore becoming more selective as their return re- quirements have increased.

Raouf Jundi : Tenor is important for Asian banks as well. Clearly they prefer the shorter end plus the higher yield.

Gilles Franck, Standard Chartered : Selectivity has become extremely important. Banks now look a lot more thoroughly into what is the value proposition. Pricing now needs to stack up to reasonable levels and ancillary business on offer has to be clearly defined, probably more so than in the past when there were promises on business that may or may not materialise. Credit committees now ask clearly what is the wallet or the shared wallet that borrowers can offer.

Rizwan Shaikh, Citi : While lenders are being selective on the basis of relationship and cross-sell opportunities, they are becoming relatively less credit sensitive. Arguably, the liquidity component in pricing has become more important than the credit component. This is especially true for the regional banks and is particu- larly relevant in sectors where banks have concentration issues, such as real estate.

Peter Bulbrook, Barclays Capital : This is true but the incredible volume of loan business that was transacted in the Middle East last year only 25 percent was actually placed with Gulf-based banks. Now, they are driving this price dynamic which seeks a return beyond their increased cost of funding, which is now on average north of 125bp or sometimes north of 150bp. So given the limited capital that have today they are clearly chasing yield. You can show them probably a whole series of different credits and different credit qualities, but price works for them, so if you have a premium price deal they will look at it pretty positively.

Declan McGrath, RBS : Sectoral issues are also important and there is different behaviour patterns within different sectors. There is a clear differential operating between the banks that are true relationship banks, be they local or non- local, versus banks that are chasing yield. A lot more banks are less focused on being relationship banks of major clients, primarily because they know that they are not going to get fed and so they are chasing yield. Certainly we have seen it out of Asia

and certainly we have seen it out of GCC banks. Therefore the risk of the major un- derwriters has increased, and we are back to the days of taking real underwriting risk. This is because investors are now prepared to wait for large loans to break in secondary and take it up at a discount at 97.5 or so to get an enhanced yield if they think that the deal is not going to find take up in syndication.

IFR: If you look at pricing in the Middle East, it seems to have increased at a higher rate than other markets.

Peter Bulbrook : The wider GCC capital market issuance that we've seen at the close of last year and early this year has driven a price dynamic which has pushed out local bank expectations. A lot of the banks that have been investing in the sukuk and the corporate bond market in the GCC now take the spreads that they are able to achieve in three or five year dirham sukuk as to where they will commit balance sheet. That's the challenge for the loan market and that's where we need to look on a relative value basis.

Declan McGrath : When credit crisis began in July and August of last year, there was more of a robustness about pricing out of the Middle East and Eastern Europe than there was in the rest of Europe and it was just a question of time until these regions caught up.

Grainne Molloy : For many local banks, the cost of funds is now significantly higher, particularly in dollars, ranging between 100bps and 170bps, and this is driving yield expectations. The other issue is the access to dollar liquidity and the desire to lend in dollars. There is uncertainty surrounding the dollar peg to GCC currencies with expectations that the local currencies will be revalued, resulting in limited desire among the local banks to lend in dollars.

Raouf Jundi : The Middle East reacted quicker to the price increases whereas only now we are seeing some of the equivalent European borrowers seeing their pricing going up. So, if you want, Europe is now catching up with what has happened in the Middle East.

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