Project bonds could fill funding gap left by banks

A deficit in construction spending due to lower oil receipts could be filled by bonds funded by institutional investors. Ahmed Jadallah / Reuters

Project bonds funded by institutional investors such as pensions and insurance firms could help to fill the gap in infrastructure spending created by lower oil receipts.

David Dubin, the Emea head of infrastructure and energy finance for Citigroup, said project bonds provided by institutional investors had “largely disappeared” from the market in recent years, pushed out as local banks offered a cheaper and less complex source of funds.

“Just like we saw in Europe 15 years ago, the banks’ level of liquidity, up until the last six months, has been so strong, and so determined … that it effectively has kept all but a certain number of transactions out of capital markets,” he said.

More recently, however, lower oil prices have meant local banks have had to contend with fewer government deposits and worsening credit ratings at the same time as having to bolster capital buffers to meet international standards.

Speaking at a Meed conference in Dubai last week, Mr Dubin said that about US$400 billion in project finance was issued globally in 2015, with 11 per cent of this in the Mena region. Most of the funding came through straightforward debt issuance, however, with only 7 per cent through project bonds.

Yet Mr Dubin argued that the weight of money from pensions and insurance firms currently pouring into specialist asset-management vehicles targeting the project bond market meant an increase to “25, 30 or even 35 per cent over the medium term is more likely than not”.

The ratings agency S&P last month said that Gulf sovereign governments faced a funding gap of about $270bn between the amount of money required to fund capital programmes until 2019 and the amount that will be allocated through contract awards.

Sikander Zaman, head of the specialist lending division at Saudi Arabia’s National Commercial Bank, argued that local bank funding is likely to be replaced by a diverse range of funding sources, including international banks, project bonds and export credit agencies.

He was, however, sceptical about the potential for public-private partnerships (PPPs).

“That’s a very fashionable thing for people to say as soon as the deficits are there for governments.

“We’ve seen it before. If you go back for the past 20 years, every time there’s a cycle and governments have a problem financing their deficits, this PPP concept comes back.

“And then as soon as oil price goes up and there is plenty of money, it becomes unfashionable again, [as] it’s just much easier to do it the simple way of going to banks and asking for the money.”

Steve Perry, the head of debt markets and syndication at Dubai-based FGB, argued that although project finance can play a role, investors usually require a higher margin for projects in the Middle East because of the perceived risk.

“When you go to [institutional funders] and say, here’s a 20-year power project in Abu Dhabi, the first thing they will say to you is: ‘where is Abu Dhabi on the map? Isn’t that near Syria, Egypt and other places that are a little bit tricky?’

“I think it has an impact. If you look at the biggest institutional pockets being probably Europe and the US, the problem for them is that they have so much to look at in their own markets that you have got to go with a product that is either priced much higher than the equivalent graded products they are currently viewing, or you need to spend many, many months explaining [a project] to them.”

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