By Santhosh V Perumal
Business Reporter
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Global credit rating agency Standard and Poor’s (S&P) expects that Qatar, along with Kuwait, may soon introduce new rules, including capital charges for bank lending to projects, which ought to affect financial services sector.
Moreover, it noted that the proposed Basel III capital norms could lead to drying up of long-term finance to Gulf projects from European lending institutions, thus paving way for project bonds in the region.
Highlighting that the Gulf project finance bank market does face regulatory “hurdles”, it said the implementation of Basel III could have a direct impact on the tenors for long-term project financing and reduce the involvement of European financial institutions in long-term lending to the region.
“Closer to home, SAMA, the central bank of Saudi Arabia, has adopted new regulations affecting financial services firms, and we anticipate that similar controls will shortly be introduced in Kuwait and Qatar. The regulations introduce capital charges for bank lending to projects that previously were not required,” it said in the report titled ‘How Project Bonds Could Plug the Potential Gap in the GCC Infrastructure Financing’.
Other regulations such as limitations on exposure by banks to single name, state-owned GREs (government-related entities) have also been discussed in the UAE.
Qatar’s capital expenditure, ahead of the FIFA World Cup in 2022, is primarily led by GREs. These entities may be able to readily obtain funds from local regional banks at compellingly low rates, in effect sidestepping the need for capital market issuance, it said.
Until now, several big-ticket infrastructure transactions have been arranged by holding companies that are effectively GREs or quasi-government, S&P said, adding “the implementation of Basel III may, in our view, encourage a number of the GREs to raise capital through a joint venture project or structured financing, especially if these regulatory changes lead to lower availability of long-term financing from banks.” The infrastructure spending in the GCC is estimated to total $2tn over the next 20 years on increasing demand from utility companies; infrastructure expansion associated with rail, ports, and airlines; and events such as the FIFA World Cup in 2022, it said.
Besides growing population, a period of relatively low investment yields and robust sovereign creditworthiness have helped the Gulf Co-operation Council (GCC) countries to increasingly go in for bond financing, S&P said. “We consider that project financing (both bank and bond) will be increasingly used in the region. However, we believe it is too early to tell whether we have reached a tipping point in project finance capital market activity,” S&P credit analyst Karim Nassif said.
There are signs that the use of bond financing could be about to take off in the project finance capital markets of GCC, S&P said.
The availability and tenor of funding by major local and regional banks, along with the pricing of bank loans relative to bonds, would be key measures in determining the progress of project finance capital markets in GCC countries over time, according to Nassif.
Finding that the capital markets in the GCC countries received a boost in August with the successful issue of $825mn in project bonds by Ruwais Power to help refinance a power and water plant in Abu Dhabi; S&P said this ended a lull in project bond activity in the region since the RasGas and Dolphin transactions of 2007 and 2008, respectively.
Although there have been large GCC project transactions such as Barzan (for the construction of a gas plant in Qatar) and Yanbu (for a new oil refinery in Saudi Arabia) successfully executed between 2008 and 2013, these have been primarily bank-funded with an important contribution from local and regional banks, it said.
Despite significant infrastructure needs in the region and relatively low yields over the past 5-10 years, the GCC project bond transactions remain low mainly on abundant liquidity in the local bank market and strong relationship lending by commercial banks to petrochemicals and energy-related projects with perceived strong creditworthiness, according to S&P.
“However, this situation may change, due in part to tightening bank regulation and also to the financing demands of other infrastructure sectors, including preparations for the 2022 FIFA World Cup,” it said.
The most significant reason for the absence of project bond transactions has been the availability of long-term sources of funding at relatively cheap rates (at least for projects backed by GREs from the well-capitalised and liquid local and regional national banks), it said.
Despite its diminishing role, bank financing from local and regional banks will remain crucial for infrastructure projects, S&P said, adding there is an ongoing need for project finance in GCC countries; however, it’s not clear whether this will take the form of bank or capital market financing.
