26 September 2016

Borrower Briefing

Middle East gets Margin-Minded Two years ago a partially-ECA-backed deal for the $2.9 billion Dubai Metro extension project would have been unlikely at best. Today, every export and project finance bank is bidding for the mandate. The Dubai metro tender, by no means one of the largest in the Middle East, is symptomatic of the pressure Middle East government budgets are coming under since the slump in oil and related product pricing. For the first time many government agencies and corporates in the region are looking at borrowing to fund major projects, and in a bank market where the cost of long tenor debt has risen due to a combination of impending Basel regulation and lower Middle East borrower/sovereign credit ratings. Consequently, the Middle East has become the growth market for export credit cover and direct loans: The total volume of export credit backed lending into the Middle East for 2016 looks set to match that of 2014 and 2015 combined by the end of the year (see chart). Orpic’s Liwa Plastics financing at the beginning of the year set the tone, pulling in support from Sace, Atradius DSB, Kexim, KSure, Euler Hermes and UKEF. And a slowdown, predicted by some bankers midyear, shows no signs of happening. Major deals in the pipeline include Tahrir Petrochemicals Corporation’s $5.9 billion petrochemicals project in the Suez Special Economic Zone, which is expected to get backing from OPIC, US Exim, Sace and UKEF; ECA-backed loans for the $3-$3.5 billion combined debt facilities for the Alba Line 6 potline expansion in Bahrain; Acwa Power has also lined up a mix of development finance institutions and export credit agencies – including EDC US Ex-Im and OPIC - to finance its 2,250MW Dairut independent power producer (IPP) project in Egypt; and KNPC is in the market with an international tranche of around $7 billion – with potential ECA backing from Kexim, Sace, JBIC, UKEF and Atradius – for its refinery expansion project. The driving force behind all this is cost of debt. For example, the all-in pricing on Liwa Plastics was around 300bp over a 16-year term. The pricing on the $1.5 billion unsecured facility for Alba – part of its potline 6 fundraising, which is also expected to include separate sukuk and ECA-backed fundraising – is rumoured to be around 325bp over Libor for seven-year debt. But pricing is not the sole driver. Many ECAs are reacting to local borrower requirements.

UKEF has added a sukuk guarantee to its standard product range following its groundbreaking guarantee for Emirates’ Airbus financing last year. Sace is also developing shariah compliant products across its range of offerings as the market readies itself for a potential bonanza of deals from Iran. Similarly, Coface has just set up shop in the DIFC to cement its Middle East footprint. With more Middle East borrowers becoming familiar with ECA products, what has begun as a reaction to tightening liquidity and the increased cost of borrowing from regional banks, looks set to become a permanent and growing part of the Middle East market – even if pressure on budgets eases in the future.

To see more coverage of trade finance activity in the Middle East, or to access our market-leading database of verified trade finance transactions, take a trial of Trade Finance Analytics.

Talking shop – ECA comment ECA: BPI France Direct lending: €13 billion per year Guarantees: €10 billion per year Innovation soft loans: €1.5 billion per year Equity investment under management: €25 billion Equity Investment per year plus indirect: €1.5 - €2 billion Number of borrowers per year: 6,000 for firect lending, 40,000 short-term lending, 4000 for innovation financing, 1,000 for equity, 200 for export insurance, 900 for advisory services. On January 1 2017, French state export guarantees management will be transferred from Coface to BPI France, a state-owned lender to entrepreneurs. What will that mean for borrowers? Nicholas Dufourcq, Executive Director, BPI France "Th