Structures and Syndicates

In gearing up for the post-Covid economy, structured finance and syndicated lending will be an important source of capital for regional businesses, and banks are now looking at leveraging technological solutions such as distributed ledger technology and smart contracts to advance negotiation, execution, administration and trading of loans

Though the COVID-19 pandemic seems to be subsiding in most structured finance markets globally and vaccination programs are currently underway, potential new variants, uneven inoculation rates and further infection waves remain a risk. “After a substantial dip in 2020, the run rate of new global structured finance issuance has now fully recovered, with ongoing weakness in covered bond volumes countered by growth in securitization,” S&P Global said in June 2021.

The most important question in the current challenging operating environment is how can banks bridge the gap between borrower demands for better pricing and longer tenor? The slowdown in economic activities due to coronavirus-related restrictions and the uncertainties around the trajectory of the pandemic forced non-financial firms to tap debt markets—and syndicated loan markets—as part of the companies’ broader efforts to secure funds for covering operational expenses and possibly boost their coffers.

According to the Bank for International Settlements (BIS), borrowing by nonfinancial firms in global debt markets surged following the COVID-19 shock and central banks played a pivotal role in accommodating the increase in funding requirements.

Syndicated loans are a significant source of capital in the Middle East. Regional banking powerhouse such as Saudi National Bank and UAE’s First Abu Dhabi Bank have become more sophisticated and are capable of meeting most of the financing needs of large businesses in the Middle East. Similarly, international banks such as Citigroup

and Dutch lender ING Group are also increasing their presence in the Middle East, as the region is gaining importance within emerging markets.

Borrowers benefit from increased access to capital and lower financial transaction costs than would be achievable through bilateral loans with individual lenders. In the past 24 months, borrowers from different sectors in the region including UAE’s Emirates Global Aluminium (EGA), the Gulf region’s biggest lender Qatar National Bank (QNB) and IGA, the operator of Istanbul’s new airport have secured funds.

Globally, borrowing by large firms in debt markets has outpaced that of midsize firms in the last two years. Moody’s said that at the corporate level, the bulk of new borrowing has been raised by large firms—with revenues above $1 billion—reflecting their better access to the booming bond market.

The COVID-19 outbreak accelerated digitalisation in the financial services sector and banks are increasingly considering leveraging technological solutions such as distributed ledger technology (DLT) and smart contracts for the syndicated loan market. Distributed ledger technology among other smart solutions is expected to advance negotiation, execution, administration and trading of loans—ideally through the adoption of single-platform solutions.

Driving forces

The travel and movement restrictions together with border closures that were introduced to curb the spread of the pandemic sparked a surge in corporate defaults globally, although collateralized loan obligation (CLO) managers have been able to mitigate the impact through trading activities.

Fitch Ratings said that most structured finance asset classes continue to perform well, although the rating agency expects an asset performance deterioration in some asset classes as the full scale of the economic fallout due to COVID-19 is still unfolding. not resort to lockdowns, the surge in new coronavirus cases due to emerging variants may cause additional lockdown measures and a prolonged recovery.

BIS said that while large corporates have likely used proceeds from syndicated loans to meet short-term liquidity shortfalls, some indicators suggest that these firms are also building precautionary buffers amid the prolonged pandemic.

Similarly, an increase in the average tenor of issuance shows that large corporates are determined to avoid near-term refinancing needs. “Like in the aftermath of the great financial crisis, large firms may gradually use or decommission these buffers and, thus, better cope with economic uncertainty,” said BIS.

The dominance of large corporates in new borrowing reflects their better access to the booming syndicated loan market. However, large corporates’ dominance in bond-based borrowing is expected to push out mid-size companies, which are also creditworthy and may show significant liquidity needs.

SYNDICATED LOAN MARKET IS ADOPTING TECHNOLOGY STEP BY STEP BY INVESTING IN VARIOUS TECHNOLOGICAL SOLUTIONS WHICH ADDRESS SPECIFIC POINTS IN THE LOAN LIFE CYCLE

– Clifford Chance

The rate of delinquencies increased in some asset classes last year, but this measure of stress credit has moderated gradually as governments in the Middle East are considering extending regulatory relief measures that allow banks to maintain lower capital and liquidity buffers beyond the end of 2021 as part of economic stimulus measures—depending on the pace of recovery and loan demand. However, although several economies in the emerging markets including the Middle East have pledged that they will

MOST STRUCTURED FINANCE ASSET CLASSES CONTINUE TO PERFORM WELL, ALTHOUGH AN ASSET PERFORMANCE DETERIORATION IN SOME ASSET CLASSES IS EXPECTED AS THE FULL SCALE OF THE ECONOMIC FALLOUT DUE TO COVID-19 IS STILL UNFOLDING

– Fitch Ratings

Bridging the gap

Syndicated loans allow financial institutions to spread the risk of a single customer usually large corporates or governments borrowing a very large amount. Governments and corporates usually seek financing through syndicated loans to fund major projects and the amount in question might be too much for a single bank to provide but a group (syndicate) could offer the loan with ease.

“The syndicated loan market could open up to more players if the back-office operations were simpler. As it is now, the pain points are many,” said Deloitte. The pain points that are associated with the syndicated loan market include the selection of both syndicate members and qualifying borrowers, the underwriting system is not connected to the diligence system and delays and intermediaries adding to the costs.

However, industry experts see DLT’s record-keeping functionality to make it easier, safer and more profitable for financial institutions to participate in a syndicated loan opportunity. According to the British law firm, Clifford Chance, the syndicated loan market is adopting technology step by step by investing in various technological solutions which address specific points in the loan life cycle.

Here’s how digitalization is expected to enhance the syndicated loan market according to Deloitte:

Efficiency: Smart contracts could make loan servicing more efficient and provide a more seamless customer experience. “Smart contracts will automatically form syndicates, verify financial information and carry out settlement services, reducing the time to fund a borrower,” said Deloitte.

Cost-cutting: Distributed ledgers and smart contracts will eliminate the need for third-party intermediaries.

Integrated: Diligence systems will communicate pertinent financial information directly to underwriting systems.

Regulation: The system gives regulators a real-time view of financial details throughout the syndicated loan lifecycle.

Security: Operational risks will be eliminated as DLT automatically disburses principal and interest payments.

MENA syndicated loans

Syndicated loans in the MENA region picked up significantly after the outbreak of the pandemic, with issuance volume surging by as much as 150% from $8.7 billion to $25.3 billion in the first quarter of 2021, according to Bloomberg.

EGA, one of the world’s largest aluminium producers, refinanced a $5.5 billion syndicated loan facility in August 2021. The new facility, a senior unsecured loan, reduced by $1 billion the size of EGA’s existing seven-year $6.5 billion loan facility that was obtained in 2019 while adjusting scheduled debt repayments including extending them by

SYNDICATED LOANS IN THE MENA REGION PICKED UP SIGNIFICANTLY AFTER THE OUTBREAK OF THE PANDEMIC, WITH ISSUANCE VOLUME INCREASING BY ALMOST 150% FROM $8.7 BILLION TO $25.3 BILLION IN THE FIRST QUARTER OF 2021

– Bloomberg

AFTER A SUBSTANTIAL DIP IN 2020, THE RUN RATE OF NEW GLOBAL STRUCTURED FINANCE ISSUANCE HAS NOW FULLY RECOVERED, WITH ONGOING WEAKNESS IN COVERED BOND VOLUMES COUNTERED BY GROWTH IN SECURITIZATION

– S&P Global two and a half years. Qatari lender, QNB, borrowed $875 million during the same month to refinance existing debt and support general funding requirements.

Bloomberg’s EMEA Capital Markets Tables, which polls the top arrangers, bookrunners and advisors across various deals including syndicated loans, bonds, equity and M&A transactions, shows that HSBC managed to secure first place in the first quarter 2021, after coming in at the second position in Q1 2020 and 2019 in the role of bookrunner. The British lender managed to beat First Abu Dhabi bank under the same role by a margin of nearly $40 million.

The Turkish wealth fund, TWF, secured around $1.5 billion from a syndicate of international banks in March 2021 to roll over a two-year loan from 2019.

In September 2021, Egypt’s Banque Misr concluded its largest syndicated term facility to date with a medium-term $1 billion loan from international debt capital markets to finance projects and contribute to sustainable development. Dubai’s largest bank, Emirates NBD, said last month that the Egyptian government had launched a three-year syndicated loan with green and Islamic finance components intending to raise $2 billion.

The fundraising exercises come as borrowers in the Middle East seek to improve their financing to reflect better market conditions after last year’s coronavirus-induced economic meltdown.”