Gulf governments a boost for investment banks

By purchasing stakes in local companies and raising billions of dollars through bond sales, governments are lifting the fortunes of bankers.

Gulf governments have helped lift the fortunes of beleaguered investment bankers in the first three months of the year, buying stakes in local companies and raising billions of dollars through bond sales. A total of US$10.7 billion (Dh39.30bn) worth of merger and acquisition deals were signed in the first quarter in the Middle East, or almost triple the amount for the same period a year earlier, according to Thomson Reuters research published today.

Overall bond activity jumped by more than seven times to $4.5bn. Stock issuances rose by 67 per cent to $3.7bn and the value of large loans arranged by investment banks doubled to $7.4bn for the quarter. The banks, meanwhile, made $175 million in fees from those deals, up 11 per cent from the same quarter last year, Reuters said. "After a very tough 2009, the Middle East investment banking industry seems to have started the year in a strong position, with the number of deals announced showing real signs of confidence returning to the market," said Basil Moftah, the managing director of Thomson Reuters in the region.

Much of that activity came from government deal-making. The biggest merger or acquisition deal so far this year was the Abu Dhabi Government's purchase in February of $2.5bn of infrastructure on Yas Island from Aldar, the property developer, according to Reuters. The second-biggest was the $1.75bn government-ordered merger of Qatar Real Estate Investment and Barwa Real Estate. The third-biggest was the purchase by Aabar, an Abu Dhabi Government-controlled investment vehicle, of 70 per cent of Arabtec, the Dubai construction giant. That deal, which has yet to be completed, was worth $1.7bn.

Those three deals totalled about $6bn, or more than half of the value of all mergers and acquisitions in the first quarter. Bond issuances were also led by governments in the first three months of the year. Two $1.2bn bonds issued by the Bahraini and Lebanese governments accounted for half of all issuance for the quarter. The largest loan arranged by investment banks was a $3.6bn deal with the International Petroleum Investment Company, an Abu Dhabi Government-owned investment arm, which accounted for almost half of the value of all loans in the first quarter.

The investment banks' growing reliance on governments fits a trend in which the public sector is participating in more deals as governments pursue policies of spending their way through the financial downturn, according to Muhammad Malick, a senior economist at Al Ahli Bank. Many governments in the Gulf have embarked on major infrastructure projects in the past year, promising to help stimulate their economies through public-sector spending that trickles down to private companies.

"The main initiative for development is by the government and mainly through project expenditures," Mr Malick said. "That creates a lot of opportunity for the private sector as well." Governments were dominant even in the stock market in the first quarter, the Reuters data show. The largest stock issuance was a rights offering by the Arab Banking Corporation in Bahrain, a wholesale bank owned by regional governments. The $1.1bn issue accounted for about a third of equity issuance in the quarter.