New Foundations for Structures

Zain Zaidi Head of CEEMEA Loans and Leveraged Finance at Citi describes the present and expected regional landscape for structured finance and syndication, highlighting some of the key markets and sectors where activity is set to increase including interesting hybrids of real-estate with other collateral, but also pointing out that small and mid-sized businesses may find access to the regional capital markets a little less quick

Are you noticing greater demand for structured financing as we move further into the postpandemic economic landscape?

Middle East markets have reverted to being fairly benign and borrower friendly, however, we do continue to see greater demand for structured finance driven by a few factors:

Certain sectors, spaces and countries still haven’t seen appetite revert in the same way and are looking at structured financings to raise funding

Some clients are looking to access alternative pools of liquidity in order to either preserve bank market capacity and / or get duration without going to public markets

Investors are hungry for yield and if a structured/ bespoke financing offers a pick-up over public securities or plain vanilla syndicated loans, there are an increasing number of investors keen to take on these deals

There are more investors willing to go further down the capital structure and consider quasi-equity instruments in search of yield

Zain Zaidi Head of CEEMEA Loans and Leveraged Finance, Citi

The regional financing market is becoming more mature and sophisticated and there is a greater openness to these structures from all parties

Which regional business or industry sectors are most likely require structured financing in the near to medium term?

We are seeing greater adoption of risk mitigation, insurance cover and development finance institution involvement in private sector transactions across the region and real-estate remains popular and in need of financing too. We are also seeing some interesting structures being contemplated for new transactions that mix real estate with other collateral to raise funding. We also notice that early-stage technology companies with more constrained cashflows and therefore with limited access to plain vanilla bank financing, are looking to raise financing via instruments that may have structural enhancement such as equity like features.

Is the regional financial services sector fully equipped to provide for the specialist needs of big business in the Middle East?

Large local and regional banks are becoming increasingly sophisticated and are capable of meeting most of the more complex needs of large businesses in the Middle East. Furthermore, international banks are focused on the Middle East, given its importance within emerging markets, providing large clients access to global expertise. We are expecting very strong borrowing volumes across the loan and bond markets in the region this year and capital is readily available at attractive terms for well-rated borrowers. Large conglomerates like Majid Al Futtaim have raised bank debt at attractive levels and bond market access for investment grade and cross-over corporates remains available and attractive too. Governments and Government related entities continue to have strong market access, not just the investment grade countries, but Oman, Bahrain, Egypt have also seen strong appetite.

Where we have seen less speedy recovery post the COVID-19 pandemic, is on small and mid-sized businesses where banks have been slower to go back to lending and the smaller size and scale of these businesses makes it more challenging to access the capital markets. This is due to it being harder to obtain favorable ratings and because the issuance size may not be sufficient to garner public investors’ interest. It is these

small and mid-sized businesses where there is the greatest need to borrow using bespoke structures and where a number of discussions are currently taking place.

THE REGIONAL FINANCING MARKET IS BECOMING MORE MATURE AND SOPHISTICATED AND THERE IS A GREATER OPENNESS TO THESE STRUCTURES FROM ALL PARTIES

Do you expect to see a greater call for syndicated loans in the Middle East in the coming five years?

As a starting point, we are at about US$98 billion of syndicated loans in MENA already as per Dealogic and will potentially close the year north of US$120 billion, given everything that is in the pipeline and fairly advanced. This would make it one of the biggest years ever from the region in terms of volumes. What is interesting this year is that Saudi Arabia makes up over 60% of the regional borrowing and this year, for the first time it will be the largest regional borrower, a distinction that had been resting with the UAE so far.

Secondly, these massive volumes are coming on the back of fewer but larger financings. The average deal size this year is over $1.5bn driven by jumbo transactions for Public Investment Fund, EIG/Aramco, Emirates Global Aluminum and others. Some of these same trends are expected to continue in the next 5 years, increasing activity out of Saudi Arabia, greater infrastructure financings and bigger acquisition financings. Some Borrowers also prefer to access the private loan market over public debt markets due to concerns over public disclosure.

Additionally, as rates start to increase, the relative attractiveness of fixed rate issuance will reduce as borrowers and issuers may not rush to lock in long-term

rates as they have been doing recently. So, I would expect to see even greater demand for syndicated loans over this time period.

Both in terms of the size and number of deals, which regional markets will see the highest levels of structured finance and syndication action in the coming years?

Saudi Arabia remains the country that we expect to see the most volumes come from for the next few years. Given the government’s plans to develop infrastructure and diversify its economy, there should be significant financing need. The UAE remains the deepest market for syndicated deals with plenty of private sector corporate activity, but Saudi Arabia also has great potential on this front too. Structured financings are harder to predict but a large number are likely to come from these two countries. Egypt also could be quite interesting on this front.