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International challenges


I


nternational banks have played a significant role in the development of the GCC region in recent years. It was European, Japanese and American money, on the whole, that helped to fuel the boom years of the early part of the 21st century. However, the benefits haven’t all been flowing one way, with the growth of the Gulf region opening up many new opportunities from which international banks can generate business. The middle part of the decade was a particularly frantic time for international banks involved in the region. Lend- ing grew at a rapid pace, from US$23.2bn in 2004 to US$122.8bn by 2007. After lending just short of US$32bn in the first half of 2008, the collapse of Lehman Brothers saw Western banks reverse the policy of ploughing staff and resources into the region to return to their home markets. Having binged on the cheap credit that these banks had provided in the proceeding years, many borrowers in the region found themselves in a quandary. Without the means to refinance maturities and other fundraising options closed to them, restructurings and defaults became more frequent.


Concerns over the ability of borrowers to repay, coupled with the more pressing issue to conserve capital, meant that bank lending fell by 75% in the first six months of 2009; compared with the same period in 2008. However, slowly, loan finance is returning for specific clients. These loans have, predominantly, been done on a club basis, with the few syndications in the project finance market. So what are the features that are shaping interna- tional banks’ attitudes to the loan market? The most prominent is the more cautious attitude. While 2006 and 2007 saw banks falling over themselves to lend into the GCC, since the events of late 2008 banks have channelled their resources towards existing clients. While some slackening of attitudes has taken place since the depths of 2009, deals have mostly been restricted to refinancing existing transactions.


Challenges for international banks operating in the Gulf Co-operation Council countries remain, but both borrower and lender are dependent on each other for future growth by David French.


Some new names have surfaced – Qatar Aviation Leas- ing Company (QALC) completed its first ever loan in March, while Aabar Investments wrapped up its debut syndicated deal in August. However, both borrowers, with their strong ties to the Qatari and Abu Dhabi governments respective- ly, represent the fact that banks, on the whole, are still only willing to lend to certain types of borrower – the triumvi- rate of quasi-sovereigns, telecoms and infrastructure. There have been deals done outside of these sectors: for example, Bank of Sharjah closed a US$150m loan in August, while a US$200m facility for Global Education Management Systems (GEMS) shows a hint of private sec- tor lending returning.


Even allowing for the odd deal outside of these three areas, other markets remain off limits for the majority of international lenders. The Saudi private sector is one such market; Dubai is another. This is because, along with Kuwaiti investment companies, the most high-profile restructurings in the region involve Dubai government- related entities (GREs), such as Dubai World, and the two Saudi conglomerates: Saad Group and Algosaibi Group . Issues at these companies have meant that internation- al banks have been unwilling to risk further exposure to similar firms and, as a result, have stopped lending. Having been burnt by these events, approaches have changed. When banks were piling into the GCC region during the boom, the pressure to make money meant they were willing to accept a lack of transparency. Even if bankers don’t like to admit it, international banks were just as guilty of name lending as their local counterparts. Having paid the price for this mistake, international lenders are demanding much more openness from bor- rowers before they part with their cash. The other consequence of the restructurings taking place, in particularly the ones involving Dubai GREs, is that banks are now more concerned with their distance from the assets and, in the case of quasi-sovereign enti-


Middle East Report 2010| pfi| 7


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