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

Declan McGrath : There have also been a reasonable number of significantly sized loans as well, which has helped that process. But notwithstanding the fact that local banks prefer to fund in local currencies and not dollars because of the depegging issue, they do have dollars. They may not be using them, but they do have the dollars, which means they are taking a view as to what the outcome may be on the depegging issue and may be trying to protect the dollars they actually have.

Rizwan Shaikh : The dollar liquidity is there, but there is a wide range of assets chasing this liquidity. Investment banks, hedge funds and private equity, are all chasing regional petrodollar liquidity so the choice that banks have today in where they can deploy their liquidity is tremendous whereas the bank market does not offer the same kind of returns.

Declan McGrath : You will continue to see options for the other currencies – whether it is dirhams, Saudi riyals or Qatari rials – and clients will take the advantage. If a client is looking to do a dollar denominated transaction they prefer to access dollars, but they are giving the option to banks to lend in their local currency because of the concern over depegging. Whether that option continues once the depegging issue is cleared - and that may take quite some time because it is a political question - we don't know, but certainly today they actually have the options and they are taking them.

IFR: Is there a pricing differential between local currencies and dollars? Does it reduce a borrower's overall cost of funds or is it just an extra pool of liquidity?

Raouf Jundi : Indirectly it does, but local banks will not go into dollar deals unless the pricing is 50 to 100 percent higher. The main purpose of the local currency tranche is to increase liquidity and clearly if you increase liquidity then you are indirectly limiting the pricing.

Rizwan Shaikh : The logical thing one would have expected to see is a smaller spread on local currency tranches compared to dollar tranches, given the higher liquidity cost of dollars. But so far we haven't seen that. This can partially be explained by the fact that some deals have had to accommodate local currency

tranches, instead of offering a dual tranche structure at the outset.

Peter Bulbrook : But we have to be careful in the sense that when we put loans to the market and to the wider investor base - whether it be a local GCC based bank, a European bank or an Asian bank - most of the loans that we work on have some form of global distribution. The spread is the credit spread, so it is difficult to differenti- ate between different currencies. The arbitrage is really the funding cost.

Investment banks, hedge

funds and private equity, are all chasing regional petrodollar liquidity so the choice that banks have today in where they can deploy their liquidity is tremendous.

Declan McGrath : There is a play within the arbitraging of the funding cost, because there are other opportunities. But you are absolutely right, because the logical step that one would think about is, if I can do dirhams and I know that these guys' costs of funding in dirhams, or Qatari rials, or Saudi riyals are lower, why should I logically not take a cheaper margin?

Grainne Molloy : Local currency tranches, differentiated in terms of margin and tenor, were prevalent in the Egyptian market as a means of maximising liquidity, in particular for longer term transactions. That has since disappeared as the Egyptian banks, and their requirements, have changed.

Peter Bulbrook : That has changed because the financing requirements of Egyptian corporates - as we saw with OTH this year - have become global financing exercises for global businesses, meaning their require- ments go outside of a local market context. Similarly the GCC today is not just a local market, it is a global financing market that sits front and centre on a global financing stage.

IFR: From the borrowers' point of view, if there is an actual requirement for dollars but they are forced to access local currency, how easy are currency swaps?

Peter Bulbrook : International banks have been committing dirhams to the dirham tranche trades this year and there is a significant arbitrage pick-up.

Declan McGrath : There is a significant chance now that they have to take the risk and costs of the swap.

Raouf Jundi : The swap market, though, is not as deep or as long, so I'm not sure how briskly they can hedge the requirements.

Rizwan Shaikh : Although this issue is starting to ease, most counterparties are on the same side of the hedge, which makes hedging large amounts or long tenors difficult and expensive. However, many companies operating in GCC with local currency revenues can take the view that even if local currencies do depeg from the dollar, they benefit indirectly anyway, so it is not critical for them to raise dollars or swap local currency debt.

IFR: What if somebody were to buy European assets? If a corporate borrower was to buy, say a telecom asset, in Europe and pay in euros would that be a problem?

Raouf Jundi : This has been done earlier through a euro club deal for an important corporate in the region. There were European banks and European banks preferred the euros to dollars in any case, because even they have a difference in funding costs. The deal went very well and the currency was not an issue.

IFR: Would that be cheaper for them?

Raouf Jundi : I don't think it is a difference in pricing.

Declan McGrath : The size of the transaction is key here. With the really big deals you may run into a little bit more difficulty than you would with smaller deals.

Raouf Jundi : We have had comments from regional banks who said, "We prefer to fund in euros or even in yen rather than US dollars", because there is less of a premium.

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