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8| pfi | Middle East Report 2010 International banks

ties, where the borrower sits in the overall structure of an economy. The immature legal structures in place in the region have made things more difficult for banks when things have gone wrong, with the framework to set- tle disputes, such as the seizure of overseas assets, non- existent or untested.

This, in turn, has impacted on lending decisions. When Mubadala was marketing its loan earlier this year, it had to drop plans to place the funds in a treasury holding SPV after pressure from banks, which were concerned about having an additional layer between them and the company. Immature legal frameworks also raised another issue for international lenders on Mubadala’s loan. Conventional- ly, all facilities involving banks from outside the region have been covered by English law. In the case of Mubadala, the borrower originally wanted to use English law for the facil- ity but UAE law for the guarantee over the SPV. While the point became moot once the SPV was dropped, it had been a significant bone of contention during negotiations. Ultimately, until there is a history of case law that bankers and lawyers can chart and base their arguments on, there is always going to be an element of doubt over local law. A legal process that takes days or weeks, rather than months or years, would also be beneficiary. The negative impact of GCC restructurings has also extended to other banks. Prior to 2008, Asian banks were a big part of many syndications but, having been burnt by the likes of Dubai World, they have all but with- drawn from the market – deals for Qatar Telecom and ETA Ascon saw limited Asian representation. Their absence is a big part of why the syndication market has failed to regain momentum lost in mid-2008. Local banks have also been missing from internation- ally organised deals. While not a consequence of the restructurings, the pricing levels that have been seen in 2010 facilities have been beyond their reach due to high- er dollar cost of funding.

Like the disappearance of Asian banks, the lack of local institutions further diminishes the pool of liquidity available to borrowers and places more emphasis on the international banks. The QALC repricing, completed in October, was a case in point, where the halving of mar- gin from 250bp to 125bp saw many regional banks drop out and internationals take on the additional burden. Finally, the consequence of international banks restrict- ing who they will lend to has created a situation where lenders are complaining that they don’t have enough good quality deals. With most banks looking for the same types of client, a well-structured facility from a good name sees banks flood in. If borrowers extend the loan, as IPIC did, this will help. However, if they don’t, as in the case of the original QALC deal, this results in significant scale-backs; to the frustration of banks.

So what does the future hold for international banks? The key point is that, in the GCC loan market, the fate of

internationals is intertwined with that of their local coun- terparts. The practices of local institutions are more impor- tant in shaping internationals’ attitudes than vice versa as, like when they enter any market, Western banks have had to mould the dynamics of their offering to attract business and not just try to imply strictly Western standards. This is why international banks were hit by the prob- lems of name lending to family-owned conglomerates. However, if local banks return to name lending, inter- nationals could be forced into following suit – despite the huge losses they’ve taken – as their offerings will look uncompetitive as a result.

The develop- ment of the GCC bond market is still well behind many other areas.

A “race to the bottom” doesn’t look likely. Locals have also suffered heavy losses and, more importantly, are tak- ing a bigger role on the world stage. This means they are adopting the Western standards required to be part of the international order. We are already seeing their increased prominence: the appointment of Qatar Islamic Bank as sole bookrunner on the internationally sold deal from Qatari Diar in 2009 was regarded as a watershed moment. This extension into the realms once considered the domain of international lenders is also impacting on their ability to secure ancillary business. Competition for roles on revenue-generating work, such as infrastructure advisories, was already tough and internationals would often complain if clients were seen to be favouring the same bank or banks. However, local institutions are now muscling in on this territory. Now, it is not uncommon to see big regional names mandated on international DCM issues. Mean- while, locals are also building out project advisory teams, with the appointment of National Bank of Abu Dhabi as financial adviser to the Abu Dhabi Ports Company proj- ect a sign of this trend.

Coupled with this additional competition is the reali- ty that auxiliary business opportunities in the Gulf are rare. The development of GCC bond markets is still well behind many other areas. Meanwhile, even though many hundreds of billions of dollars are being invested in infrastructure projects in the region, companies – even the large quasi-sovereign entities – only have the capac- ity to work on a handful of projects at any one time. Therefore, if ancillary business is not forthcoming, it will be harder to convince credit committees to take fur- ther exposure on to their balance sheets. Banks will have to decide whether they can live with the small rev- enue-generation of syndicating loans – and hope the rela- tionship will pay off in the end – or withhold further lending until the borrower can promise something more. Ultimately, while there are issues, internationals are not going to abandon the GCC region. A balance between the needs of borrower and lender is needed, though, as both are interdependent. Local banks have come a long way but do not yet have the clout to replace what internationals have to offer the GCC countries.

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