Gulf poised for major growth in syndicated loans

Dubai: The Gulf region is poised for big growth in syndicated borrowings as companies from the region seek to expand regionally and globally through organic expansion and acquisitions, Declan McGrath, managing director and head of European Corporate Loan Markets told Gulf News.

"Prior to the past year, most of the loans from the region were led by project finance. But the composition has changed dramatically with explosive growth in acquisition financing through the corporate loan syndication market. There is going to be significant growth in corporate fundraising as more and more family-owned businesses from the region begin to raise funds from the loan market," McGrath said on the sidelines of a recent conference organised by the Loan Market Association in Dubai.

Credit spreads

"Widening credit spreads since July last year saw some GCC firms postponing their fund raising through bond market. The subprime related issues have not been a key driver of the increase in syndicated loans from the region. On the contrary, even prior to the subprime issues came to the fore, there have been big growth in companies raising funds through syndication," said McGrath.

The Gulf's loan markets have traditionally been dominated by financial institutions and project financing, but 2007 saw an increase in corporate borrowing and acquisition finance. The majority of big-ticket borrowings from the UAE last year were backed by merger and acquisitions (M&A) activity as state-owned firms embarked on acquisition spree backed by debt-finance.

Major debt issues by Dubai-based firms such as Dubai Holding, Borse Dubai and Dubai World were driven by international acquisitions. Bankers expect larger M&A-driven financings to emerge from the region in 2008, which could produce big-ticket club loans from the UAE. "Currently there is a very small market in terms of acquisition finance in the region. We expect big growth in this segment as corporates from the region look for overseas expansion and private equity firms begin leveraged buyouts," he said.

Although the cost of finance have increased, McGrath said there are a large number of projects in the region that deliver ample returns that can offset the increased cost of funds.

Trend: Lending hits $107b

According to the latest Thomson IFR Briefings, syndicated lending in the Gulf region rose close to 40 per cent in 2007 to a new record of $107 billion last year against $77 billion in 2006 as the regional bond issues grew 21 per cent at $33 billion. The average size of a syndicated loan in the region is now about $1 billion, up from $500 million in 2004.

The pipeline syndicated borrowings from the UAE remained strong in the second half of last year although the subprime mortgage crisis in the US virtually dried up the syndicated lending in Europe and the US while widening credit spreads increased the cost of funds for Gulf borrowers.