Syndicated lending back in style

Stocks are falling and bond markets are in turmoil, but popularity is returning to syndicated loans that were out of favour due to low yields. Kin Cheung / AP Photo

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."