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MEED Business Review / 65

Since mid-2015 the main concern within the GCC’s banking sector has been liquidity. As 2015 financial results and Central Bank

statistics are posted, analysts will be able to study the extent to which liquidity has tightened, and how differ-ent banks have fared.

Banks can benefit from falling liquid-ity by raising their margins on loans as competition eases off. This could support profits. But to keep lending they need to keep attracting deposits, by competing on interest rates.

The figures to watch are loan and deposit growth rates, as well as loan to deposit ratios. Alternatively, banks could issue more bonds, which is more expensive, because the liquidity situa-tion is pushing coupon rates higher.

Last year was a year of transition be-tween a banking sector boom fuelled by very high liquidity due to high oil prices prior to mid-2014 and a more conserv-ative environment. Borrowers who did not already secure cheap financing and refinancing have missed their chance.

Central banks monitored the situ-ation, but only the UAE took action, informally restricting shareholder divi-dends to under 50 per cent of profit.

As the economic situation in the GCC weakens, central banks may have to take an active role in 2016. This will be more difficult while the US Federal Reserve is raising its interest rates, if states want to maintain dollar pegs.

Liquidity to an extent depends on con-fidence. Central banks need to make the right moves to ensure it is maintained. Philippa Wilkinson

FinanceCentral banks across the region need to maintain the confidence of their borrowers, so banks must keep on lending

Liquidity fears the new normal

Business Outlook

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Business Outlook

Riyadh sets timeline for airport privatisation

Maaden closes refi nancing

Foreign fi rms can own at least 75 per cent shares in some airports

The recent selection of an Irish company to operate Terminal 5 of King Khaled In-ternational airport in Riyadh kick-starts the kingdom’s

privatisation strategy for its airports.All 27 airports, four of which cater to

international fl ights, are planned to be privatised between 2016 and 2020.

Foreign investmentUnder the privatisation programme, foreign investors can buy into at least 75 per cent of some airports, without the need for local partners.

Faisal al-Sugair, vice-chairman at Saudi Arabia’s General Authority of Civil Aviation (Gaca), says that local investments in some airports will be capped at 25 per cent to ensure foreign

Philippa Wilkinson

Saudi Arabia’s Maaden Phosphate Com-pany (MPC) has closed a SR11.5bn ($3.1bn) refi nancing deal, according to two banking sources.

Saudi Arabian Mining Company (Maaden) announced that its subsidiary received commitment letters from local and international banks in November 2015. The refi nancing cut borrowing costs on facilities signed in 2008. With-out construction risk and a better liquid-ity situation, pricing from banks should be lower.

It was reported in November that it would have a seven-year term, with an

operators have a majority holding in operating contracts.

The privatisation programme is under-stood to follow a three-step process that would include:� Turning airports into an airport company� Privatisation of the operation and mainte-nance sectors, starting with Jeddah’s King Abdulaziz International airport � Adoption of a build, transfer and operate (BTO) strategy

The second step entails transferring employees to the investor. Gaca will “bear the capital expense to establish the project while the investor will have its share of the revenue.”

The BTO model has been adopted by the Prince Mohammad bin Abdulaziz International airport in Medina.Jennifer Aguinaldo

Leads MEED’s banking and fi nance sector coverage in the region, with particular focus on project fi nance

amortising structure, meaning it will be paid down throughout the term.

Maaden did not respond to a request for comment.

Initial dealThe original fi nancing included a $2.1bn conventional and Islamic syndicated fi nance deal over 16 years, a $200m 16-year Korean Export Insurance Corpo-ration-covered facility, a $400m 16-year facility provided by the Export-Import Bank of Korea, and a $100m revolving working capital facility.Philippa Wilkinson

SAUDI ARABIA

SAUDI ARABIA

MAADEN FUNDING BY TRANCHE* % of $3.96bn

*=2008; ECAs=Export credit agencies; SIDF=Saudi Industrial Development Fund. Source: Maaden

Commercial banks 52

Public investment fund 27

SIDF 3Corporation 3

South Korea ELAs 15

Working capital 3

66 Finance.indd 66 21/01/2016 19:53

MEED Business Review / 67

Petroceltic close to bankruptcy

Dublin-based oil company Petroceltic has failed to meet payment obligations on $218m-worth of secured senior debt due to low oil prices, it said in a stock market disclosure.

The firm is actively looking for takeover offers, but is not thought to have received any serious en-quiries since 23 December.

Having failed to raise additional finance to de-velop the $2bn Ain Tsila gas and condensate field in Algeria, Petroceltic can only cover its costs there until the third quarter of 2016.

Petroceltic farmed out part of its stake to state-owned Sonatrach, reducing its interest to 38.25 per cent. About $90m of the proceeds

remained by the end of November 2015.The small oil company signed a $500m syndicated

loan deal in 2013 to develop Ain Tsila. Due to devel-opment and investment milestones being postponed, Petroceltic is required to make payments under the terms of the loan. The lenders worked with Petro-celtic by delaying payments until 15 January, and are supporting its search for buyers and new sources of finance.Philippa Wilkinson

Irish firm can only cover its costs at Algeria’s Ain Tsila field until the third quarter of 2016

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oil companies will struggle to sell off their assets in 2016

Small and medium oil companies

operating in the region will struggle to find buyers for the assets they want to sell off, according to analysts at Edinburgh-based Wood Mackenzie.

The Middle East and North Africa is not set to see an active oil and gas mergers and acquisitions market in 2016, but some activity is possible.

Divestment hitsThe lack of interested buyers will hit inter-national oil companies (IOCs) divesting from assets in Iraqi Kurdis-tan, Egypt and other less stable regions. The only exception could be companies already operating in these areas, and look-ing to consolidate.

“In Iraqi Kurdistan, it’s possible that small-er oil companies could be taken over, but who would buy them?” says Jessica Brewer, senior research analyst for Middle East upstream at Wood Mackenzie. “Only another company operating there would

consider it given the security risks.”

Payment arrears by the Egyptian and Kurd-istan Regional govern-ments will also dis-courage cash-strapped investors.“If you look at Egypt, lots of IOCs are in the same scenario, with small companies struggling,” says Mar-tijn Murphy, research

manager for North Af-rica upstream at Wood Mackenzie. “They are being paid in Egyptian pounds due to the for-eign currency shortage. Smaller companies will want to get out, and the buyers will likely be larger incumbents who are comfortable with Egyptian pounds.”Philippa Wilkinson

Oil and gas assets lack buyers

RegiOnal

source: Petroceltic

PetROceltic Debt Of $218m ■ international finance

corporation (Us)■ HSbc (UK)■ nedbank (south

africa)■ Standard chartered

(UK)

$ 1 bncapital of adnoc’s new investment arm

$ 4 bnvalue of Dragon oil in ENoC acquisition

14.4 m b/dPetroceltic’s average production in 2015

67 Finance.indd 67 21/01/2016 19:54

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Business Outlook

Iran riskier than ever for global banksThe fear of more billion-dollar fines could make international banks nervous about providing services in Iran and the wider Middle East

The lifting of nuclear sanctions on Iran could increase risks for global banks that carry out US dollar clearing.

The banks’ caution will severely limit investment in Iran, which is seeking billions in foreign investment in various sectors, including oil and gas, and petrochemicals.

European banks were heavily fined by US regulators over stripping information from US dollar transactions to hide the involvement of Iranian and other sanc-tioned entities.

The fines for violating sanctions on Iran were for infractions before additional nuclear sanctions were imposed in 2012. US primary sanctions, which are still in force, prevent any US person or entity from facilitating business with Iran, including any dollar clearing.

Maintaining dollar clearing houses in the US is an integral part of global banks’ busi-ness models, and they process millions of transactions daily.

“Banks still need to be absolutely vigilant and very cautious,” says Adrian Nizzola, partner at UK-headquartered law firm Sim-mons & Simmons. “They need to ensure that their banking systems are still robust and transparent.”

The risk of Iranian transactions in dol-lars going through will increase as Iranian banks are reconnected to the Brussels-based Society for Worldwide Interbank Financial Telecommunication (Swift) and the country is reintegrated into the global economy.

None of the six international banks con-tacted by MEED would comment.

Iran-related transactions in other curren-cies are now permitted, but banks will probably avoid them until their posi-tion is clarified.

The pressure from US regulators is likely to make global banks more cautious in the region. US and European banks could rethink their relationships with Middle East banks doing significant business with Iran, to avoid inadvertently processing dollar transactions and breaching primary sanc-tions. Large Middle East banks relying on significant correspondent relationships with US banks will therefore be cautious on Iran.

“Unlike other industries there is no first mover advantage for banks,” says Nizzola. “The first in will probably be very small regional banks with the least exposure risk to the dollar.”

With the US imposing new, ballistic mis-sile sanctions on Iran, banking sector rela-tionships and confidence are not expected to be re-established in the short term. Philippa Wilkinson

Iran

The financial sector’s caution will severely limit in-vestment in Iran

Bank CountryAmount of

settlement ($m) Year of settlement

BnP Paribas France 8,900 2015Commerzbank Germany 1,450 2015

Standard Chartered UK667 2012300 2014

Credit agricole France 787 2015

Source: MEED

major fIneS for BreaChIng US SanCTIonS

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Business Outlook

Bank profits hold up under strainResults will be closely watched to gauge the effects of tight-ening liquidity across the region on banks’ ability to lend

Early bank results for 2015 show banking sector profits have held up well, despite slowing or even reversing deposit growth.

Saudi Arabia’s National Commercial Bank (NCB) saw its deposits fall by 3 per cent over the year, while loans continued to grow at 14 per cent. This kept net profit growth at 5 per cent year-on-year, to reach SR9.1bn ($2.4bn). NCB is still well below the Saudi Arabian Monetary Agency’s (Sama) 85 per cent loan-to-deposit ratio (LDR) limit, at 77.8 per cent, allowing it to continue lending in 2016.

Banque Saudi Fransi saw its LDR rise to 87.1 per cent, and will have to step up efforts to attract deposits. Its total deposits fell 2.4 per cent, while loans and advances grew modestly at 5.9 per cent year-on-year. Net profits hit SR950m, a year-on-year growth of 14.8 per cent.

Other GCC countries saw a gentler slow-down in deposits. Qatar National Bank man-aged to grow its deposits by 10.5 per cent, although this was still outpaced by loan growth of 14.8 per cent. Smaller Qatari banks are expected to post less solid results.Philippa Wilkinson

FurthEr rEading

NBAD commits $10bn lending to renewable energy sectorNational Bank of Abu Dhabi plans to funnel $10bn over the next 10 years into renewa-bles projects focused on environmentally sustainable activities.

Chinese bank signs agreement for Egypt coal plantThe Industrial Com-mercial Bank of China has signed a financing agreement for the planned $6.4bn Hara-wein coal-fired power plant in Egypt.

Qatari banks wait for liquidity strategyQatari banks are wait-ing for Qatar Central Bank to communicate its strategy to ease li-quidity, which tightened after Doha issued a $4.3bn domestic bond in September.

Oman raises $1bn from sovereign loanOman has closed a $1bn sovereign loan. The five-year loan has a margin of 120 basis points over the London interbank offered rate (Libor).

Read more about finance on www.meed.com/finance

rEgional

Emirates NBD 2015 profit risesEmirates NBD has reported a 39 per cent jump in 2015 net profit as income rose and provisions dropped at Dubai’s largest lender by assets.

Net profit rose to AED7.12bn ($1.94bn) from AED5.14bn for the year ending 31 December 2014. Total income jumped 5 per cent to AED15.2bn, while deposits grew by 11 per cent to AED287bn.

The impaired loans ratio for the lender dropped to 7.1 per cent from 7.9 per cent for the same period. The impairment charge of AED3.4bn during the year was 32 per cent lower than

in 2014. The cost of risk for Emir-ates NBD has also fallen for the sixth consecutive quarter, while the net provisions include more than AED2bn of write-backs and recoveries, which helped to boost the bank’s coverage ratio to 111.5 per cent.

Total assets sat at AED406.6bn at the end of 2015, up from AED363bn a year earlier.

Income for the bank’s global markets and treasury operations, however, fell sharply by AED636m to AED199m at the end of 2015.Sarmad Khan

uaE

Profits ($bn) % change

Loan-to-deposit

ratio (%)

Qatar national Bank 3.1 7.7 98national Commercial Bank 2.4 5 77.8Emirates nBd 1.9 39 94.2Bank Muscat 0.5 7.5 100

Sources: MEED; Bank results

KEy BanKing rEsults

70 Finance.indd 70 21/01/2016 19:57

MEED Business Review / 65

Liquidity concerns in the GCC have been growing since mid-2015, and loan-to-deposit ratios and interbank rates are beginning to show that condi-

tions have tightened as predicted.The lower levels of liquidity will not

prevent major infrastructure projects from going ahead, however. There are three reasons for this. Firstly, less important projects will be shelved or delayed, thinning out the pipeline. Sec-ondly, priority projects, such as in the utilities sector, will be bankable enough to attract regional and international banks, especially if they have sovereign guarantees attached.

Thirdly, under the more difficult circumstances, pricing must rise to be attractive. This means overall development costs will be pushed up,

but bank margins will improve. If inter-est rates in the West head below zero, banks could find yields in the GCC more appealing.

So far, the transition is manageable. Even in Oman, where the liquidity squeeze is expected to impact the most, projects are moving towards financial close. Banking syndications are lined up for Liwa Plastics and two independent water projects.

Egypt has the opposite issue – liquidi-ty is plentiful, but risk perception is high. Development banks have reached capac-ity, local banks are restricted in dollar lending and international banks are far from comfortable on political risks. Only utilities projects with strong develop-ment bank support can be expected to close, such as renewables projects.Philippa Wilkinson

FinanceWith lower levels of liquidity unlikely to halt key project finance deals in the GCC, only Egypt will struggle to fund its plans

Priority projects will go ahead

Business Outlook

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Business Outlook

Liwa Plastics seeks February financing close

Ratings downgrade for three GCC countries

Orpic loans priced before GCC-wide liquidity squeeze began to push up margins

Oman Oil Refineries & Petroleum Industries Company (Orpic) is likely to sign financing deals on the $4.5bn Liwa Plastics

Industries complex by the end of Febru-ary, according to a source close to the project. Orpic will borrow $3.8bn in a 15-year tenor loan.

Participating banksTwenty commercial banks, including the UK’s HSBC, France’s Credit Agricole and the local Bank Muscat, will extend financing. Six export credit agencies are participating:■ Korea Export-Import Bank (Kexim);■ Korea Trade Insurance Corporation (Ksure);■ UK Export Finance;

Philippa Wilkinson

US ratings agency Standard & Poor’s (S&P) has lowered its ratings for Saudi Arabia, Oman and Bahrain as the econo-mies of the three GCC states become increasingly vulnerable to the prolonged period of low oil prices.

S&P last reviewed the three countries in 2015. In January this year, the agency low-ered its price assumptions for Brent crude by about $20 a barrel over 2016-19. S&P does not expect the agreement between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze oil output at the lev-els reported in January to have a material impact on its oil price assumptions.

■ Sace (Italy);■ Atradius (Holland);■ Euler Hermes (France).

For the $895m package awarded to It-aly’s Technimont, a $890m credit line is being disbursed by Italy’s Cassa Deposi-ti e Prestiti and commercial banks.

Kexim is to lend $370m on South Ko-rean firm GS Engineering & Construc-tion’s package.

Orpic is understood to have secured good terms on the deal. Loans were priced before a GCC-wide liquidity squeeze began to push up margins.

Japan’s Sumitomo Mitsui Banking Corporation is the financial adviser.

Orpic signed more than 15 agree-ments to build and operate the Liwa plastics project in December 2015.Philippa Wilkinson

Follow @ Philippa_MEED on Twitter to stay up to date on project finance deals in the region

For Saudi Arabia, S&P lowered its for-eign- and local-currency sovereign credit ratings to ‘A-/A-2’ from ‘A+/A-1’. The out-look is stable as the agency expects Riyadh to take steps to prevent further deterioration in the fiscal position.

Lasting impact “The decline in oil prices will have a marked and lasting impact on Saudi Ara-bia’s fiscal and economic indicators,” says S&P. “We now expect Saudi Arabia’s growth in real per capita GDP will fall below that of [its] peers.”Colin Foreman

Oman

regiOnaLaverage gDP grOwth, 2016-19%

2.9

1.4

4

2

Source: Standard & Poor’s

Bahrain

Oman

Qatar

Saudi

Arabia

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Huge project fi nance pipelineProject fi nance in 2016 shows potential, but banks may hold back

It could be a bumper year for proj-ect fi nance, with deals worth more than $6bn already secured in the utilities sector.

More deals are planned. MEED’s Project Finance Outlook has identifi ed more than $42bn of project fi nancing needs across the Middle East and North Africa for the rest of 2016.

The challenge is that with low oil prices and falling liquidity in the GCC and a cur-rency shortage threatening investment in Egypt, not all of this will result in a 2016 fi nancial close.

The overnight Emirates Interbank Offered Rate (Eibor) has risen from an average of 0.095 in January 2015 to 0.218 in January 2016. The three-month Saudi Interbank Offered Rate (Sibor) rose from 0.862 in December 2014 to 1.333 in December 2015. Other GCC interbank rates follow similar

The fall in government revenues push-ing the busy pipeline of projects requiring fi nance is also reducing government deposits in domestic banks, a key funding base. This has hit liquidity since mid-2015.

Higher margins“Bankable projects will continue to get fi nance, however liquidity for long-tenor projects is getting tighter in the region, which is refl ected in higher pricing expec-tations,” says Kapil Kumra, head of project fi nance, foreign corporate group, at the National Bank of Kuwait. “There won’t be a dearth of fi nancing for the well struc-tured transactions, but margins will be up.”

Some projects, such as Oman’s Liwa Plastics complex, went to the market before the effects were felt, and are expected to reach fi nancial close shortly with lower rates. Other hydrocarbon and industrial

projects in the GCC could face delays or be shelved due to falling oil prices.

Priority schemes, such as the Al-Zour North 2 independent power and water project (IWPP) in Kuwait, and Oman’s Ibri/Sohar independent power project and Barka and Sohar independent water proj-ects, are expected to secure fi nancing with relative ease. They are seen as bankable projects with strong government support.

Breaking down the project fi nance pipe-line for 2016, power and water is by far the largest sector, thanks to the tried and tested IWPP model in the region.

“Well structured long-term project fi nancing (and public-private partnerships [PPPs]) in traditional sectors such as power and water continue to be desirable assets for commercial banks and export credit agencies,” says Maarten Wolfs, partner and infrastructure fi nance leader at UK-based PwC. “The fi scal benefi t of PPPs is interna-tionally accepted and well understood by banks, contractors and developers. GCC governments are beginning to understand this and prepare PPP programmes in the appropriate sectors of waste water, trans-port, education and health.”Philippa Wilkinson

FURTHER READING

Coal developers request more fi nanceThe developers of Dubai’s Hassyan coal plant are renegotiating with Chinese lenders over plans to devel-op phase two of the facility in addition to phase one.

Egypt signs loan for hydrocarbons storageThe European Bank for Reconstruction and Development and the International Finance Corporation have agreed a $341m project fi nance deal with Egypt’s Sonker Bunkering Company.

Dubai Metro bidders prepare proposalsBidding consortiums for the contract to design and build the new metro link to the Dubai Expo 2020 site are preparing fi nancing packages to be submitted with commercial bids.

Ireland’s Petroceltic given more timePetroceltic’s lenders extended the deadline for the repayment of more than $218m in senior secured debt until 19 February.

Read more about fi nance on www.meed.com/fi nance

REGIONAL

PROJECT FINANCE PIPELINE* $m

Egypt 17,545

Other 8,000

Oman 9,440

UAE 4,850

Kuwait 2,700

*=2016. Source: MEED

67 Finance.indd 67 18/02/2016 17:53

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Business Outlook

Saudi Binladin looks to transform business amid debt troublesThe kingdom’s biggest contractor is mulling plans to diversify away from contracting for state entities

With new business on hold and the status of its existing projects in limbo, Saudi Arabia’s biggest contractor by

turnover, Saudi Binladin Group (SBG), is looking to transform its business model, to fi nd new revenue lines and address some of its debt issues.

The embattled contractor is mulling plans to diversify away from contract-ing for state entities and establishing a new business for real estate devel-opment, according to a Riyadh-based banker and a Mecca-based construc-tion industry sources familiar with the company’s discussions.

SBG, which has traditionally relied on multibillion-dollar government infrastructure projects for business, holds large parcels of land in and around major cities, including Jeddah and capital city Riyadh. It is now con-sidering the option of using its land bank to build large-scale commercial and residential projects, as well as develop land for third parties.

The shift in strategy follows Riyadh’s decision to introduce an annual 2.5 per cent fee on undeveloped urban land designated for residential or commer-cial use. The Housing Ministry said the policy targets unused, privately owned land nationwide that can be better used to solve the housing problem.

Finding new revenues lines are even more important as SBG is barred from winning new contracts in the king-dom. It is unlikely the fi rm will be able to work on any projects of signifi -cance until the government clears the

MEED online

company in an inquiry into the Mecca Grand Mosque crane accident that claimed more than 100 lives.

MEED on 1 February reported that Riyadh has completed the inquiry into the crane collapse and it is expected to announce the fi ndings within weeks.

About half a dozen engineers em-ployed by SBG, the main contractor on the mosque expansion project, have been found negligent, two people familiar with the matter said. It is understood SBG could be penalised with hefty fi nes, but the contractor is expected to be cleared to carry on work on the project. SBG has already paid compensation to victims of the accident, according to some sources.

Future projects The future of schemes the contractor is already executing, also looks uncer-tain. MEED previously reported that Saudi Arabia’s Finance Ministry has instructed SBG to also stop work on the expansion of the Prophet’s Mosque in Medina, Islam’s second-holiest site.

The move comes as the kingdom cuts down spending on multibillion-dollar projects amid falling revenues on the back of sliding oil prices.

The ministry sent a letter to SBG’s general manager on 29 December, just a day after the kingdom announced a budget with sweeping economic re-forms. In it, the contractor was asked to fi nish some of the ongoing work on the site then to stop execution of the project thereafter until further notice. No reasons were given for the move.

Read more news and analysis on Saudi Arabia atwww.meed.com

SAUDI ARABIA

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SBG was ordered to stop work on the Prophet’s Mosque in Medina amid Saudi government spending cuts

Commercial banks can now lend as much as 90 per cent of deposits

In a bid to ease growing pressure on liquidity, Saudi

Arabia’s banking regulator has raised the loans-to-deposit ratio in the kingdom.

This will allow Saudi commercial banks to lend as much as 90 per cent of their deposits as credit and advances.

Central bank Saudi Arabian Monetary Agency (Sama) had previously allowed local banks to lend only 85 per cent of their deposits.

The loans-to- deposits (LDR) ratio is a regulatory tool that is an indication of the health of a financial institution.

Saudi Arabia’s cap of 90 per cent is still lower than in the UAE, where finan-ciers can lend more than 100 per cent of their deposits.

The rise in the LDR ratio allows more money to be lent to the corporate sector, temporarily keeping a check on corporate loan rates from climb-ing further.

The three-month Saudi interbank

offered rate has jumped to 1.73 per cent, the highest level in seven years, from below 0.8 per cent in the middle of last year.

The kingdom’s banking system has felt the squeeze in the past year, after the govern-ment resorted to selling

bonds to local financial institutions in order to plug the budget deficit, which totalled almost $100bn in 2015.

The lack of fresh deposits from oil pro-ceeds has also added to liquidity stress.Sarmad Khan

Saudi central bank raises lending cap

It is not known whether SBG will be retained as the main contractor on the project, if and when it comes back online. If the firm is removed from the ongoing projects, such as the one in Medina, it will further compound cash flow issues.

Debt troublesSBG is already in talks with Saudi and regional lenders to delay repaying some of the debt it owes, two people familiar with the situation told MEED on 7 February.

The contractor is also looking to raise cash from regional and interna-tional lenders outside Saudi Arabia to meet some of its short-term liabilities.

“SBG is talking to banks on an individual basis as and when loan repayments are coming due,” says a Riyadh-based banker. “It has so far been up to date with payments owed to us.”

A company spokesman said the financial decisions and actions by SBG are to be handled exclusively and directly between the firm’s finance department and relevant stakeholders, including the company’s partners, the banks and other financial institutions.

The spokesman did not comment on whether SBG has missed any of the loan repayments, or whether it is pre-paring to enter a formal restructuring of its debts.Colin Foreman and Sarmad Khan

90%saudi loans-to-deposits ratio cap

$100bnsaudi budget deficit in 2015

$116bnDrop in saudi foreign reserves during 2015

$616.4bnsaudi foreign reserves at end of 2015

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As regional banks take a cau-tious stance due to liquidity concerns, the GCC’s reli-ance on foreign finance is growing once again.

Many international lenders pulled back from the region following the global financial crisis in 2008. Domestic banks were flush with liquidity and were lending at highly competitive rates.

Now the dynamic has changed again. Slower rates of deposit growth in GCC banks and fears of reduced economic growth are pushing up pricing again.

While pricing hikes are lagging behind sentiment, they do provide an opportu-nity for international banks to compete again. Japanese banks are dominating the GCC project finance market. They took major portions of debt for Oman’s $6.5bn Liwa plastics project and Qatar’s

$3bn Facility D independent power & water project, the two project finance mega deals that closes in the first quar-ter of 2016. They have also been active on the corporate side.

At the same time, the global financial sector is in a state of flux. European and Japanese banks are facing negative interest rates while the US Federal Reserve is determined to continue tightening its monetary policy, even if it slows the pace of rate hikes.

Withdrawals from the global banking system by oil exporters are also affect-ing foreign banks to a lesser extent, while sluggish global economic condi-tions will hurt their growth and profits.

They will find the GCC less attractive as they watch governments manage the fallout from lower oil prices. Philippa Wilkinson

FinAnceWhile loan pricing hikes are lagging behind sentiment in the GCC, they do provide an opportunity for international banks to compete again

The return of foreign banks

Business Outlook

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Business Outlook

Banks sign $4bn of funding for Liwa plastics project

Engie in talks over Oman IPP refinancing

Orpic expected to reach financial close on scheme by early April

Atotal of 19 banks have signed financing docu-ments on the $5.2bn Liwa plastics scheme in Oman.

Oman Oil Refineries & Petroleum Industries Company (Orpic) is expected to reach financial close on the project by early April. It is borrow-ing $3.8bn on a 15-year tenor loan. The lenders are:■ Arab Banking Corporation (Bahrain)■ Bank Dhofar (local)■ Bank Muscat (local)■ Bank of Tokyo-Mitsubishi UFJ (Japan)■ BNP Paribas Fortis (France)■ Credit Agricole Corporate and Investment Bank (France)■ Credit Industriel et Commercial (France)

Philippa Wilkinson

UK/French Engie (formerly GDF Suez) is discussing refinancing Oman’s Barka 3 and Sohar 2 independent power pro-jects (IPPs) with banks. A team led by Engie secured $1.3bn of project finance in 2010, with a 15-year tenor and a debt-to-equity ratio of about 70:30.

Project breakdownEach project has a capacity of 744MW and both were fully commissioned in 2013. Sohar 2 cost $900m, while Barka 3 cost $800m, totalling $1.7bn. The remaining debt is thought to be more than $1bn.

■ Export Development Canada■ National Commercial Bank (Saudi Arabia)■ Societe Generale (France)■ Sumitomo Mitsui Banking Corporation (SMBC) (Japan) ■ Natixis (France) ■ Korea Development Bank■ HSBC (UK)■ JPMorgan Chase Bank (US) ■ KfW Ipex-Bank (Germany)■ Cassa Depositi e Prestiti (Italy)■ ING Bank (Holland)■ UniCredit (Italy)

SMBC was also the financial adviser. Six export credit agencies are partici-pating, including Korea Export-Import Bank, UK Export Finance, Holland’s Atradius and France’s Euler Hermes.Philippa Wilkinson

Follow @Philippa_MEED on Twitter to stay up to date on project finance deals in the region

The lenders were:■ Bayern LB (Germany)■ Credit Agricole CIB (France)■ Natixis (France)■ Credit Industriel et Commercial (France)■ Europe Arab Bank (UK)■ HSBC (UK)■ KfW (Germany)■ Standard Chartered (UK)■ Korea Export Import Bank (Kexim)

On the current loan, the commercial tranche was priced at 200 basis points over the London interbank offered rate. Philippa Wilkinson

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$1.3bnProject finance secured by Engie-led group

15 years Tenor of loan

70:30Debt-to-equity ratio on loan

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Emirates airline considers $1bn sukukDubai’s flag carrier has yet to mandate lenders on the financing deal

year $913m sukuk. UK Export Finance guaranteed the debt, which was 3.6 times oversubscribed and was priced at 90 basis points over the mid swap rate.

Emirates is likely to structure the potential Islamic bond along the lines of the previous deal, according to one source. Sarmad Khan

Dubai’s Emirates, the world’s biggest airline by interna-tional passenger traffic, is in talks with banks for a po-tential sukuk (Islamic bond)

to fund its fleet expansion, according to two sources familiar with the matter.

Initial stage The talks are at an initial stage and Emirates has yet to mandate lenders on the deal. It is among several financing options being considered by the carrier, say the sources, who asked not to be named as the information has not been made public. The sukuk could be worth close to $1bn, according to one of the sources. “With the amount of deliveries [Emirates has], that [sukuk issuance] is definitely in the mix,’’ one source says.

The airline had last tapped the Islamic debt market in March 2015 with a 10-

Al-Masah hires banks for London flotationly in 2017, says the source, who asked not to be identified as the information is private.

Avivo is valued at between $800m and $1bn, but Al-Masah has yet to de-cide on the percentage of shares it will sell to the public.

Spokespeople from Credit Suisse, Al-Masah and Deutsche Bank declined to comment.

Avivo operates two hospitals, 14 spe-ciality centres, eight dental centres, six pharmacies and two diagnostic facilities in the UAE and Kuwait.Sarmad Khan

Dubai-based asset manager Al-Masah Capital Management is being advised by Germany’s Deutsche Bank and Zurich-based Credit Suisse on an initial public offering (IPO) of its healthcare unit, Avivo, according to a source famil-iar with the matter.

Flotation dateThe company plans to raise $200m before the IPO from strategic investors, and has already submitted documen-tation to the London Stock Exchange (LSE). Al-Masah aims to float the shares in the fourth quarter of this year, or ear-

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Emirates airline is planning to expand its fleet

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68 \ MEED Business Review

Business Outlook

KPC denies lukewarm interest in $10bn loan

State oil company Kuwait Petroleum Corporation has rejected suggestions that there is low banking sector appetite to participate in a KD3bn ($9.98bn) sindi-cated loan sought by its refineries affiliate Kuwait National Petroleum Company (KNPC).

Several banks contacted by MEED said that they will not participate in the loan due to low pricing.

Some banks already declined to participate during the informal book-building as KNPC aimed to price the loan at 100 basis points above Kuwait interbank overnight rates for a 10-year tenor.

The US dollar tranche is expected to be priced higher, but still aggressively.

The mandated lead arrangers include National Bank of Kuwait (NBK) and Kuwait Finance House for the Kuwaiti dinar and Islamic finance tranches re-spectively. They are set to officially begin syndication on the KD1.5bn commercial tranche in March, which will have a sovereign guarantee.

Concerns over tighter liquidity are pushing up in-terbank rates across the GCC, with overnight rates in Kuwait at 0.69 per cent and one-year interbank rates reaching 2.25 per cent, according to central bank figures in mid-March. This compares with one-year ask rates of 1.56 per cent in mid-March 2015.

This would put KNPC’s cost of borrowing below interbank rates, leaving no profit margin for lenders.

Some banks say they would be willing to reconsider if slightly higher pricing or a shorter tenor could be negotiated.Philippa Wilkinson

Banks worried about low pricing on Kuwait oil company debt

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Gap between borrower expectations and bank pricing is widening

the small number of syndicated loan deals coming to

the market in the GCC is contributing to uncer-tainty over pricing.

The gap between borrower expecta-tions and the higher pricing banks want is also widening.

The number of syndicated loans fell significantly in late 2015, according to the UK’s Dealogic, with just 14 deals worth a total of $8.2bn. This compares with 55 deals worth a total of $39bn in the first half of 2015, and 50 deals worth a total of $35bn in the second half of 2014.

Continued decline Activity during the first quarter of 2016 suggests the decline has continued. The only busy market was Oman, while Japanese banks dominated the few syndicated loans to close across the GCC.

“There are not many deals left, so the pricing benchmark has not ad-justed to recent changes in the market,” says one regional banker. “There are always differing

expectations between the borrower and the lender, but they get ne-gotiated. Now there are no deals in the market.”

Borrowers are still expecting the low pricing they enjoyed in 2014 and early 2015, with large, state firms securing margins on medium-term debt about 100 basis points over interbank rates.

But liquidity con-cerns mean interbank rates have risen in all GCC states. This means banks need higher margins to make lending commercially viable, closer to 200 basis points over. The situation is exacerbated by under-developed bond markets, which prevent banks from looking ahead using yield curves.

“From a pricing per-spective, we don’t have long-term issuance, so we don’t have a bench-mark,” says another re-gional banker. “It would be much easier to pres-ent a case on whether a price is fair or not if we had a developed capital market with five- and 10-year debt.”Philippa Wilkinson

Fewer deals elevate loan pricing worries

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Mouayed Makhlouf

IFC steps up counter-cyclical investment in the regionConflict and oil prices drive demand for development bank support, says the IFC’s regional director

The US-based Internation-al Finance Corporation’s (IFC’s) counter-cyclical mandate means the develop-ment bank is stepping up its

activities in the Middle East and North Africa (Mena) region.

It aims to contribute $1.5bn to support the private sector in the region between June 2015 and June 2016, from independent power projects (IPP) in Iraq to small and medium enterprise credit lines in Egypt.

“The role of the IFC and other DFIs [development finance institutions] is more important than ever,” says Mouayed Makhlouf, Mena regional direc-tor at the IFC, part of the World Bank.

“There is very low sentiment on the back of low oil prices. This is having a severe impact on the [regional economy], as well as conflict and the refugee crisis.”

“The GCC needs to diversify its economy and bring in the private sector and investment activity”

Although the fiscal balance of oil im-porting countries, where the IFC tends to lend, should be improved by falling energy import bills, there are downsides. For decades, oil exporters have support-ed their neighbours with investments and grants, but lower incomes and liquidity have cut into this contribution.

“The investment we used to see from the GCC to the rest of the Arab world is not going any more,” says Makhlouf. “[But] we … are still investing [in the market], mobilising capital in these countries, and bringing confidence.”

Advisory workWhile the IFC does not lend in the GCC, saving its funds for low- and middle- income countries, it does offer advisory services. It works with governments to expand the role of the private sector in countries where the economy is driven by public-sector spending. The IFC pub-lic-private partnership (PPP) advisory unit has been busy across the region.

“The GCC needs to diversify its econ-omy and bring in the private sector and investment activity,” says Makhlouf. “We have advised Saudi Arabia on PPP in airports such as Taif and Medina.”

A tender for the contract to build, transfer and operate Taif International Airport in Mecca is expected in 2016. The airport will have the capacity to handle 5 million passengers annually.

The $1.2bn Prince Mohammed bin Abdulaziz airport in Medina was commissioned in June 2015 by Tibah,

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