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| Jacco Keijzer, managing director, head of debt capital markets, Middle East and Africa at RBS |
Before the 2008 economic crisis, financing in the Middle East was the complete opposite of the US. It was 95 per cent loans and five per cent bonds, while the US was more like 80 per cent bonds and 20 per cent loans.
The US debt capital markets and investor base were so much more developed, while in the Middle East bank lending was still abundant and cheap.
Then the crisis hit and banks suddenly became far more reluctant to lend. There was an element of “I’ll give you an umbrella, but if it rains I want it back”. And bonds, with their longer tenors and strong monetisation models, became the natural place for businesses to access more diversified funding.
The bond market in the Middle East is therefore accelerating. Volumes rose from USD31 billion in 2010 to USD42 billion in 2012 and already stand at USD16 billion as of April this year (source: Dealogic).
The key word, so important after the disasters of 2008, is comfort. The bond markets have a heap of disclosure requirements which create greater transparency and security, making them highly attractive.
While this need to bare your heart and soul initially made many Middle East businesses nervous, the benefits of long-term funding at attractive rates helped them overcome their fears. Those now accessing the capital markets are finding they can invest more easily and grow their businesses.
Pre-crisis, there was too much short-term lending, with terms of up to five years constantly being rolled over. When the money ran out, those loans had to be restructured urgently.
But the duration of a bond starts at five years and can last for three decades and beyond. Borrowing in the debt capital markets is much more of a marathon, not a sprint. And that means it can weather fluctuating market conditions far better.
This has led to a shift towards bonds in the Middle East which, in turn, has led to more borrowing.
The cash is certainly there. Although there was a slow-down in the Middle East market after the financial crisis, it wasn’t as badly affected as elsewhere because the central bank acted quickly and pumped some AED50 billion into the system to ensure banks remained highly capitalised.
Liquidity is streaming into the region – we see around USD20 billion of fundraising a year – and with the bond markets becoming more popular, companies are benefitting from the mix of different ways to get to it.
Sovereigns were the first to go down this road, particularly in the Middle East where they still enjoy high ratings – so important to bond buyers. Government-related entities soon followed and now corporates are taking their first steps.
Companies considering it should ensure they can walk before they run and are ready for the bond markets. Don’t simply leapfrog banks and go straight to bonds. Take a look at the loans market first as it might just meet your needs without the extra work involved in the capital markets.
Bonds, after all, are time-consuming. It can take months to prepare all the appropriate paperwork. A first time rating process can take eight to 10 weeks.
Rating agencies will want to see you twice a year to check everything is up to speed. And whereas banks will help if you run into difficulties because client relationships are important to them, investors are far tougher and problems could even lead to personal liability cases.
Banks are still very much involved in this market. In the Middle East, we have seen the emergence of sukuks – bonds that comply with Islamic religious law – but in most cases companies are accessing them through local banks which are buying into that market hugely. Banks are acting as joint bookrunners on deals but, at the same time, given their appetite for this asset, they are buying and holding on to the instruments themselves.
More generally, businesses still need their banks to advise them on the complexities of the bond markets and on getting the most from their money – by looking at borrowing in different currencies for instance.
Looking ahead, we will see a continued move away from loans towards bonds in the Middle East. I don’t think it will reach US levels, but it is likely to be far more balanced – 50/50 instead of 95/5. As confidence in the market continues to grow, more non-government bodies will start looking at it too.
With an ongoing, massive need for infrastructure financing in the region, this is particularly welcome news. The money is there, the access is there, and the bond markets are in the Middle East to stay.
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