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

Declan McGrath : There's quite a few European banks, second tier names, which are having difficulty funding dollars just like the GCC banks.

Peter Bulbrook : We have seen that as well.

Gilles Franck : These transactions get done up to a point, but it is never going to be the big volumes.

IFR: Seven year tenors have been mentioned. They have more or less disappeared from Europe now. Are they possible in the Middle East?

Peter Bulbrook : It's the optimal tenor horizon that garners the most market liquidity. And present experience suggests that's probably optimal around three years right now or one to three years, and that's not so different from the wider EMEA market anyway, even for investment grade in Europe.

So five plus one plus one, and seven year tenors are probably something that we will not revisit soon on a wider EMEA basis. We might see five years for the strong relation- ship transactions that are maybe just clubs or relationship held positions.

Declan McGrath : There is a real differential between corporate clients, for example, who have got their ten, twelve or so very close relationship banks that have been feeding them for the last three or four years. However, just before that they got rid of the other banks that made up their syndicate group because they weren't able to provide them with enough ancillary business. Now, for a certain size of deal, they will get the deal done and they will get the five years that we have just talked about. However I do think that in the last two cycles where there have been seven year tenors and where pricing was very fine, what clients are now saying is, "Okay, we can see pricing is going up but, guess what, we are not moving, we are going to keep that seven year deal there at Libor plus 15 basis points", and so the banks are saying, "Right, well, we are not going to get caught in the same way again".

Peter Bulbrook : You have to remember as well that the volume of liquidity that has poured into the Gulf has come from European and Asians banks. We have all been experiencing extensions now on cheap seven year deals and in a capital

Declan McGrath : But there are clients who are still looking for seven and ten year deals for specific purpose-related transac- tions. They are still trying, but they are coming up against a brick wall with the banks because the banks are just not prepared to do it.

Grainne Molloy : To access Asian liquidity you need to aim for their sweet spot which is certainly not five years but is more likely between one to three years. If you look at the average tenor of deals done this year so far, you will find that it is probably about two to two and a half years in terms of average maturity.

IFR: Given the amount of "Dubai Inc." paper to hit the market in the past few years, how are lenders coping with concentration issues?

Peter Bulbrook : It is a question that comes around every week at the moment. It is an interesting one to solve. The background to a lot of the concentration around "Dubai Inc." is that a lot of the financing has been transacted on a very short-term basis largely with the expectation of being bridged to capital markets, which really for the best part since December, just hasn't been there or hasn't been there at the right price for the issuers to take these bridged positions out. By the time we get to the end of Q3 or Q4 this year there's circa US$20bn of short-term paper, whether that be syndicated or held on banks balance sheet that needs to be refinanced. So the questions will be: Is there is a wide enough market capacity in dollars? Can you syndicate that amount paper? And on what terms and what price?

Declan McGrath : There are some clients in the region who refuse to pay the price that is being demanded by the banks. They are not saying that they don't recognise that there is a fair price to be paid for a transaction, but certainly I have seen a couple of clients relatively recently who have said, "Okay, thank you, we know it is maturing, we will repay it, thank you very much but we are not going to renew it, even for two or three years, at the price you are suggesting".

constrained world that doesn't quite work today; so not too many banks will be suggesting that the best access to the market or balance sheet is through seven year commitments.

Raouf Jundi : These clients are betting on the markets moving back in their favour in the short-term, which probably is not going to be the case. Sooner or later they will realise that they need to come back to the market and they will have to pay up.

Declan McGrath : A number of these loans were put in place on the basis that they will be there for the shorter term. Where and how long the volatility is going to last in the capital market where they would be expecting to place the longer maturity dated paper is an open question.

Peter Bulbrook : It is an interesting sales challenge when you are underwriting and distributing loan paper today in terms of being credible with your refinancing story for an investor that is buying short-term paper. This is because the last thing that an asset play investor wants to do is put a position on and be expected to roll, unless of course they then, at the roll point, command a higher price, which is not really where the clients want to see their funding cost and their financing exercise driven towards. So we are at a delicate balance right now to see where this capital market opens once again in sufficient size to be able to take some of the pressure away from the bank market.

Rizwan Shaikh : Capital markets do - as we have seen in the last few months – provide windows of opportunity even in current markets. The issue here with a lot of borrowers is accepting the levels at which they are open. Frequent issuers like Gazprom, VTB and others from the region who had strategic deals to finance, e.g. VimpelCom and KMG have issued record breaking jumbo bonds over the last few months. So the capital markets certainly remain accessible for solid credits, but the borrowers need to reconcile with the fact that they are available at a different level. When banks start seeing that they are being left to hold paper at sub-market levels because issuers don't want to pay capital markets levels, they will look to gradually reprice that paper until the disin- centives for accessing capital markets disappear.

Peter mentioned earlier there is US$20bn of short-term paper which is maturing before Q4, but if you look at the other natural maturities for longer dated deals that mature this year, that number adds up to close to US$40bn. That's a lot of refinancing to be done and clearly that is

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