Gulf Syndicated Loans at Four-Year Low Amid Swing to BondsBy
GCC syndicated loans have dropped 65% to $19.2b this year
Project contracts awarded in 1Q in the Gulf fell 16 percent
Syndicated loans in the six-nation Gulf Arab region are having their slowest year since 2013 as public spending on new projects declines and borrowers switch to the bond market.
The volume of bank loans to the region, which includes the two biggest Arab economies of Saudi Arabia and the United Arab Emirates, has dropped 65 percent so far in 2017 to $19.2 billion, the lowest for the period in four years, according to data compiled by Bloomberg. In contrast, money raised on the international bond market has surged 46 percent to $42.7 billion, a record for the period.
Governments and state-owned companies across the Gulf Cooperation Council are reining in spending after a halving of oil prices since June 2014 pushed state budgets into deficit. Belt tightening has driven total borrowing down almost a quarter this year, but more of the money raised is being packaged as bonds which often offer longer maturities than loans and allow access to a broader variety of investors.
“Given the macro picture, demand for investable capital is obviously not as buoyant,” Jamal Al Kishi, the Dubai-based chief executive officer for Deutsche Bank AG in the Middle East and Africa, said in an interview. Borrowers are realizing the “benefits of issuing in the capital markets as opposed to going to banks” and the gap in terms of cost between syndicated-loan facilities and the capital markets has narrowed significantly, he said.
The value of contracts awarded for infrastructure and industrial projects in Saudi Arabia fell 29.3 percent in the first quarter from the preceding three months, Abu Dhabi Commercial Bank PJSC said in a report. Projects commissioned in the first quarter across the GCC, including in Qatar, Kuwait, Oman and Bahrain, fell 16 percent from a year earlier.
The “anemic start” to syndicated loans this year is due to “continuing economic uncertainty plus the high volume of loan market activity we saw in 2016 and 2015,” Andy Cairns, the global head of corporate finance at First Abu Dhabi Bank PJSC, said by email. “There is little new money currently being sought and many refinancings have already been spoken for because borrowers took advantage of favorable loan market conditions over the past two years.”
The current trend of a greater reliance on the bond market than on syndicated loans for financing represents a positive rebalancing of the funding mix for corporates and quasi-sovereigns entities in the region, according to Al Kishi at Deutsche Bank.
"Commercial banks are not structurally well suited to warehouse long-term debt, it is the capital markets that should be engaged in that," Al Kishi said. "As we move forward we will see further rebalancing toward the bond market, cannibalizing in a healthy way the loan market" with both growing over time, as has happened in Europe and Asia, he said.