DUBAI: Credit markets are sending a harsh message to Gulf companies slowly emerging from the global financial crisis and now seeking expansion opportunities: line up your best assets as collateral to secure financing.
The sovereign debt troubles in the euro zone, sluggish growth of the global economy and a recognition that they may have lent too freely in the past are prompting banks to become more cautious in their lending, and to demand tangible assets as backing for loans rather than implicit guarantees.
"The financing environment currently is certainly not conducive for borrowers in the region," said Suketu Sanghvi, head of structuring and investments at Essdar Capital, an investment banking and fund management firm in Dubai.
"Borrowers will need to put a good credit story or security collateral to raise money in this market. This is expected for most borrowers in the region, and the situation will continue for at least the next six months."
This marks a major change in the Gulf, where many corporate borrowers were offered credit for years without having to put up assets as collateral. Loan activity shrank dramatically during the global crisis of 2008-2009, picked up in 2010, and has decreased again this year, Thomson Reuters data shows.
"Lending standards appear to have tightened and aligned with lending practices in other regions…" said Martin Kohlhase, senior analyst for corporate finance at Moody’s Investors Service.
Paul Donovan, chief global economist at UBS, said: "We are in a classic economic environment where we are raising risk, we are raising the cost of capital, and we are reducing the supply of capital.
"This region needs to be more dependent on its own sources of funding. It’s a challenge that needs to be met."
The new constraints on lending could curb economic growth in Gulf in coming years. But they may also make growth more stable, by subjecting corporate borrowers and their projects to more market discipline.
"It can be a balancing act of enforcing and maintaining stricter lending standards against the risk of choking off economic growth by being too conservative," said Kohlhase.
Loans worth $8.67 billion were extended in the Middle East including Israel during the second quarter of this year and $7.57 billion during the first quarter, compared to levels above $10 billion in each of the previous three quarters, the Thomson Reuters data shows. About half of that activity was accounted for by the United Arab Emirates, Saudi Arabia and Kuwait.
Quarterly lending in the Middle East is far below record levels above $40 billion hit in 2007. While some of the drop since then is due to lower demand for funds, a considerable portion of it is the result of tighter supply.
European banks
The trend is clearest for European banks, historically the largest providers of capital to Gulf companies but now struggling under a debt crisis back home and facing funding squeezes themselves.
But banks in the Gulf are also worried about managing their exposures to limit loan loss provisions, which have risen since 2008. Michael Tomalin, the CEO of National Bank of Abu Dhabi , the UAE’s largest bank by market value, told Reuters in July that he expected the bank’s non-performing loans to rise to between 3 and 3.25 percent of its loan book by the end of this year, from 2.65 percent at mid-year.
Lending costs have risen sharply, even though central banks in the Gulf have flooded their money markets with funds to aid their banking systems.
The recently agreed refinancing of an $850 million loan for DP World’s parent company, Ports and Free Zones World, pays a margin of 350 basis points, double the pricing on the original deal. This was in line with the experience of other Dubai government-related entities that have approached the market in recent months, including Investment Corp of Dubai.
The emirate’s sovereign wealth fund secured a $2.8 billion refinancing with banks at 350 bps, a hike on its borrowing cost of 125-150 bps on its original $6 billion loan.
Dubai’s debt crisis in 2009 and political instability in the Middle East have caused banks to focus on lending to only the top tier of government-related companies, compounding worries at second-tier companies which need to raise cash.
In the bond market, Gulf credits have not been spared the aggressive selling seen in developed markets in response to the euro zone crisis over the last few months. In the past month, average yields for companies as tracked by the HSBC Nasdaq Dubai GCC Corporates bond index touched a peak of 5.634 percent on Oct. 4, from 4.757 percent on Sept. 9.
Companies are feeling the impact. The world’s largest shopping arcade, The Dubai Mall, has been offered as collateral by its builder Emaar Properties against an $800 million loan, four banking sources familiar with the deal told Reuters last month.
The sources, who declined to be named because they were not authorized to speak to media, said the developer had offered a total of four malls for the loan. Emaar said in a statement that the report was incorrect, but declined to give details of its funding plans.
Even the region’s sovereign wealth funds are on occasion having to offer collateral for financing.
Abu Dhabi’s investment fund Aabar, which bought Abu Dhabi Commercial Bank’s 25 percent stake in Malaysian group RHB Capital , will get a $1.9 billion loan from ADCB to pay for the deal, sources familiar with the matter told Reuters this month.
Aabar’s parent International Petroleum Investment Co obtained the loan from ADCB by using its deposits with the bank as collateral, the sources said, after Aabar earlier rejected a financing proposal by an international consortium of banks as being too expensive. Aabar declined to comment.
Holding ground
Some blue chip firms are holding their ground and refusing to offer collateral for loans.
Emirates airline, whose $1 billion bond offering in June was six times oversubscribed, is looking for financing as European lenders pull back, and is considering local banks for a possible loan, banking sources said.
"Emirates may refuse to offer collateral, which is why they may face rejections from some regional banks," said a banking source aware of the matter. "But Emirates has many options and lenders are comfortable with the company." The airline said it would not comment on rumors or speculation.
Companies are also turning to Asian lenders, which have largely escaped the balance sheet damage suffered by European banks. However, Asian banks may require collateral, and because interest rates are higher in Asia, their loans may not be cheap.
China Development Bank was one of the lead arrangers for a $2 billion loan to Saudi Arabian construction company Saudi Oger loan last month.
"Borrowers are having to rely on Asian lenders who usually do not lend without adequate security collateral," said Sanghvi.
"Asian lenders also lend at higher margins on account of their own funding costs." –Additional reporting by Rachna Uppal
