Gulf banks gear up for boom in structured finance

As companies struggle to raise other types of debt from turbulent credit markets, demand is expected to increase for structured project finance.

As companies struggle to raise other types of debt from turbulent credit markets, demand is expected to increase across the Gulf for structured project finance, according to BNP Paribas. In structured project finance, the repayment of the debt is ensured by the operating cashflow of the project, and the French bank expects it will gain market share in a region where bank lending has long dominated. "Structured project finance will be one of the beneficiaries of this tight liquidity situation," said Jean-Christophe Durand, BNP's regional director for the Middle East. "These days, project finance with strong sponsors and well-defined structures has a huge advantage over plain vanilla financing." Companies throughout the region are struggling to raise fresh funds as lenders find themselves short of liquidity after foreign investors withdrew funds last year. The UAE is estimated to have lost about Dh180 billion (US$49bn) in deposits and stock market investments last autumn after foreign investors who had parked funds in local banks on the expectation of a dirham revaluation withdrew their capital when they realised the currency peg would not be changed. A project finance covenant gives lenders a guaranteed payment stream. Project finance deals typically involve public sponsors as well as international lending agencies. "Plain corporate money is no longer easy to get. If you have a private initiative for a power plant with 20-year financing it is far more difficult to go to a committee," Mr Durand said. Abu Dhabi profits from this situation because it has a past record in project finance. "It went through the cumbersome process despite having lots of cash," he said. By contrast, the take-up of structured project finance in Dubai has been slower as much of its infrastructure development has been based on property sales. BNP Paribas, which has been in the region for 35 years, recently relocated seven corporate finance specialists. So far this year, it has increased its staff numbers by 50, some of whom were relocated and some newly hired. About 400 of its 700 regional employees work at its regional headquarters in Bahrain. BNP Paribas sees most project finance opportunities coming from Qatar, Abu Dhabi and Saudi Arabia, where it now has asset management, commercial and investment banking operations. Martin Preston, a project finance lawyer with Norton Rose in Dubai, said: "Certainly some projects have been delayed due to the financial markets but the good ones will go ahead. Obviously a lot depends on the covenant's strength, political agreements, counterparties and termination payments." Mr Durand said his bank expected to raise up to $300 million for a new private equity fund and aims to secure about half of that by the middle of next month. BNP Paribas will provide about a quarter of the fund's capital using its own money, focusing on "opportunistic projects of reasonable size" in the Gulf. "We already have some ideas. The main purpose is not to sit on the money, and to go for the second tranche once it is filled," Mr Durand said. The bank's optimism contrasts with the recent fortunes of the private equity industry, which saw deals decline by 60 per cent in the first half. Regional buyout companies have amassed significant amounts of capital under management that has yet to be deployed. Such funds amount to about $11bn, according to the Gulf Venture Capital Association. [e-mail] [e-mail]