With bond markets convulsing, syndicated loans - which fell out of favour because of low yields on offer from capital markets - are back in style.
But interest rates are expected to rise in 2015 following comments from the US Federal Reserve chairman, Ben Bernanke, spelling an end to the central bank's quantitative easing policy.
US 10-year treasury bonds sold off sharply following the announcement, with Dubai and Abu Dhabi bond yields also rising yesterday. Bond yields move in the opposite direction from price.
A prolonged period of falling yields for issuers of bonds and sukuk over the last few years had meant companies were able to tap capital markets with relative ease, said Karim Nassif, a credit analyst at Standard & Poor's.
"What we may be seeing is a situation now where because of treasury rates in the United States and potentially the impact on pricing in the region, bank financing may once again prove to be a compelling means of financing," he said.
The withdrawal of European banks as a result of troubles in their home markets was resulting in an opening for banks seeking to enter the region, Mr Nassif added.
Though borrowing costs for Middle Eastern companies and governments were likely to rise, there were alternatives to dollar-denominated bonds available that could mitigate rising interest rates, said Raza Agha, the chief economist at VTB Capital in London.
"Both Dubai and Abu Dhabi can further lower the cost of borrowing by issuing either euro-denominated paper, and/or sukuks which have done better in the recent sell-off," he said.
Sadara Chemical Company, a joint venture between Saudi Aramco and Dow Chemical, signed a financing deal on Sunday to raise US$10.5 billion as part of the construction of a massive $19.3bn petrochemical complex in Jubail. The deal also incorporated a $2bn sukuk launch.
It is the biggest such deal in what had been a lacklustre year for syndicated lending.
Banks have arranged $19.1bn of syndicated loans in the Middle East so far this year, compared to $26.3bn worth of bonds, according to data compiled by Bloomberg.
The stringent capital requirements known as Basel III also compelled banks to hold more capital against their bond portfolio, making fixed income less attractive to lenders.
Bond markets may still be an attractive choice for chief financial officers, said Mark Watts, the general manager of National Bank of Abu Dhabi Asset Management Group.
"You can look at the yields available in bond markets today and depending on the project you want to finance, you've got the option of syndicated loans or doing a bond," he said. "At the moment, secured five and 10-year funding with rates as low as they are still makes a very good deal."
Companies have little time to launch bonds before Ramadan begins in early July, a time when the business tends to slow down. But those that do issue within the next few weeks could still be received favourably by bond markets, he added.
Some riskier issuances, such as MAF Holding's proposed perpetual bond last month, were put on hold by the volatility on bond markets.
Syndicated loan deals are increasing in the meantime.
Investment Corporation of Dubai, which has traditionally shied away from public debt sales, closed a $2.55bn loan deal earlier this month.
"It all depends on which bank you talk to, and whether they've got the balance sheet to lend out," said Tim Plews, the head of Middle East financial services and markets at Clifford Chance.
"At present we're seeing a mixed approach - some organisations are thinking about mixing a bond with a loan to get financing."
ghunter@thenational.ae
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Banned items
Dubai Police has also issued a list of banned items at the ground on Sunday. These include:
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Political flags or banners
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Bikes, skateboards or scooters
Women & Power: A Manifesto
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Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
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December 5 - 23: Shooting competition, Al Dhafra Shooting Club
December 9 - 24: Handicrafts competition, from 4pm until 10pm, Heritage Souq
December 11 - 20: Dates competition, from 4pm
December 12 - 20: Sour milk competition
December 13: Falcon beauty competition
December 14 and 20: Saluki races
December 15: Arabian horse races, from 4pm
December 16 - 19: Falconry competition
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December 20 and 21: Sheep beauty competition, from 10am
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