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Middle East Report 2010| pfi| 15

Confidence about the financial stability of banks is returning

Those that are looking to do a deal in the near-term will find that it is a good time to access the bond market. Any Qatari credit seems to be drawing huge ranks of investors willing to part with their money – the book for QIB’s US$750m sukuk issue in late September was US$6bn. Abu Dhabi credits are in the same boat, albeit to a slightly less- er extent, while the rarity value of Saudi bank paper means that there will be plenty of investor interest in any FI issue from the kingdom. Meanwhile, because GCC bonds tend to carry a fixed rate of interest, rather than a floating rate like the majority do in Western Europe, today’s low interest rate environment means that borrowers can lock in, in historical terms, a very cheap rate if they choose to tap the market now. However, the bond market won’t accommodate all- comers and many banks will find themselves in a posi- tion where a DCM issue is unviable. Also, the market will have finite appetite for FIG paper from the GCC and many GCC banks do not have credit ratings; an essential for a bond issue in today’s market.

Therefore, the option for the majority will be the loan market. However, the FI market has been almost non-exis- tent since late-2008 – the only transaction was a US$150m one-year club deal for Bank of Sharjah – so it will require a major turnaround to meet the huge demand that will be for refinancing. So, will this happen in time? The consensus among bankers is that it will, albeit slow- ly at first. They point out that, because of the large amounts of government support that have been in place through 2009 and into 2010 to shore up banking systems in the GCC, FIs have had no need to turn to the market to procure finance.

Such a scenario is understandable, as why would you borrow from the market at a high interest rate when you have authorities providing bountiful capital at very cheap, if not non-existent, rates? Therefore, it will only be as these financial supports are withdrawn that banks will need to return to the loan market for their funding needs. Confidence about the financial stability of banks is returning. Many of the debt problems in the corporate sector have now been flagged, with any necessary pro- visioning scheduled to take place gradually over a peri- od of time. With the fear subsiding, banks will begin to trust each other once more with their capital and this will allow a FI loan market to return.

This will not only be of benefit to the banks but also to the wider market. A functioning FI loan sector, with banks lending to banks, will help to get the flow of cap- ital moving again. The current paralysis for many sectors of the corporate loan market stems from the fact that

banks are hoarding their capital over fear of what could happen. But, once money starts to flow again, banks will be more comfortable in lending in general; and not just to other FIs.

A syndicated FI loan market will only come back much later.

A complete return for the FI loan market isn’t on the cards for the foreseeable future, with the first wave of lending set to be done solely on a club basis. With banks also concentrating on existing clients and wary of expand- ing their loan books – general loan growth in the region isn’t expected for some time yet – this coming wave of refinancings will be done, predominately, by the insti- tutions that took part in the original deal. A syndicated FI loan market will only come back much later and, even when it does, it will only be for a limited number of banks. These institutions will be the larger enti- ties that have reputations beyond the region and that can attract a significant amount of foreign capital. These will also be, more often than not, the banks that will also have access to the bond market. Therefore, for their refi- nancings, they will be able to pick and choose which is the best route for them to go down and act accordingly. So are we going to see a new debt problem in the GCC as this wave of maturities reaches us? The short answer is probably not. While options might be slightly con- strained today, the reopening of the FI loan market will be a huge help in rolling over existing obligations and should meet the needs of the majority of institutions. The larger entities in the region will be have the option of utilising the bond market or putting together a loan deal; either on a club or, later on, a syndicated basis. Even if the bond market does become crowded, it will still have the star quality to draw in investors’ capital; it just depends on whether they are happy paying a few basis points extra for guaranteeing access. They will also have the ability to tap multiple curren- cies to navigate around any potential oversupply problems encountered by the dollar market – National Bank of Abu Dhabi has been a leading exponent of exploring issues in other currencies.

As for the rest, those that retain the confidence of their existing bank group should be able to take advantage of the returning FI loan market to complete a deal on a club basis. This will become easier as credit begins to flow again. However, these banks will have to be prepared to pay more than they did during the boom years for the privilege. The only issue will be for those that cannot get their existing banks to recommit or that are unwilling to pay the margins necessary to secure a new deal. Then, repaying the loan might be the only option left open to them.

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