Syndicated loans are set for a boost as lower bank deposits and shaky confidence in emerging-market bonds send regional and sovereign borrowers flocking towards alternate sources of finance.
Syndicated loans, in which a group of financial institutions pool together to fund a client, have this year grown to the highest levels in the Arabian Gulf since 2008 as demand outstrips appetites for traditional bank loans, bonds or sukuk. The rise of syndicated loans is also a shot in the arm for banks, providing with extra cash from arrangement fees at a time when interest-generating areas of the banking industry, such as lending to small- and medium-sized enterprises, are coming under pressure as the economy slows.
“I see considerable opportunity over the next couple of years, and it will start at the sovereign level because the sovereigns were running large budget surpluses. Now they are in deficit mode,” said Andy Cairns, the managing director and global head of debt origination and distribution at National Bank of Abu Dhabi, the biggest bank by assets in the UAE.
About US$65 billion of syndicated loan deals were signed this year, according to Bloomberg. That does not include a $4.9bn syndicated loan for Emirates Global Aluminium announced last month in which NBAD is the bookrunner, or the main underwriter, in what will be the largest syndicated loan in the country since 2008. In all NBAD has raised Dh73.38 bn in bond, sukuk and syndicated loan markets for UAE clients this year, more than any other domestic or international bank, according to Dealogic, a financial services data provider.
While investors have been dumping emerging market bonds this year, issues from the Gulf have not been as affected because regional currencies are pegged to the US dollar and have not depreciated as most other currencies of developing countries have. Analysts are expecting further losses on emerging-market bonds if the US Federal Reserve begins raising its interest rates this month and the greenback strengthens even more against other currencies.
Mr Cairns noted that the oil-rich Gulf countries, reeling from the steepest drop in the price of oil since the global financial crash of 2008, have many tools at their disposal to raise funds, such as taxation, drawing from their sovereign wealth funds and raising long-term debt through syndicated loans, bonds and sukuk.
As a result, Mr Cairns said it was not inconceivable that sovereigns in the Gulf may raise $20bn in bonds next year, almost 10 times as much as the $2.5bn they raised this year, which will be another piece of welcome news for lenders. In recent years, banks have been tapping fee-generating businesses such as syndicated loans to beef up profits as record-low interest rates have tightened margins from loans. A boom in syndicated loans should help banks if they see a drop in other areas of their business.
Still, despite all the gloom surrounding the economies of the Gulf, which rely heavily on revenue from oil to fund their budgets, the net current account surplus of the region stands at about $2.4tn, according to economist estimates. While foreign exchange reserves in Saudi Arabia, the world’s biggest oil exporter and the region’s biggest economy, still provide an ample buffer, they have been falling fast in the past year. A side effect of that has been that many GCC countries that placed deposits in regional banks are now calling them back.
Alex Thursby, the chief executive of NBAD, said in October that UAE banks had lost more than $15bn in government deposits from September 2014, when the drop in oil price began to accelerate.
“GCC governments have been parking a portion of their excess money in the GCC banking system,” said Ram Mohan, a fixed-income portfolio manager the Abu Dhabi asset management firm Invest AD. “Even the UAE banks have had a lot of deposit inflows from the regional governments, and that money has been going back into the respective government coffers with the steady decline in the oil prices since the third quarter of 2014. That is what has tightened the systemic liquidity in the GCC.”