October 5, 2017 / 6:01 PM / a year ago

LPC - Emerging markets lending continues to disappoint

LONDON (Reuters) - Syndicated lending in Central Europe, the Middle East and Africa (CEEMEA) of US$77.8bn in the first three quarters of 2017 is the lowest total for the first nine months in eight years since 2009 and 52.6% lower than US$164bn raised at the same point in 2016.

Low volume is due to a lack of refinancing opportunities, strong and competitive bond markets and political volatility - underpinned by persistently low oil prices - which continue to hamper economic growth across the region and curb appetite for new loans.

Lending to the Middle East and Russia has seen the steepest declines.

At US$28.25bn in the first three quarter, Middle Eastern borrowing is at its lowest level in six years and is 60.5% lower than US$71.5bn at the same time last year. Russian loan volume of US$6.5bn for the first nine months is also 73.9% lower than US$25bn a year earlier.

“The emerging markets have had an extremely disappointing year”, a London-based syndicate head said.

Russia’s loan market has benefitted in 2017 as banks’ attitudes towards Russian companies are relaxing for the first time since sanctions were imposed on Russia by the US and Western Europe in 2014.

Improved banking sentiment comes, however, at a time when Russian companies’ are pulling back from international borrowing as rising commodities’ pricing is strengthening their finances.

Russian companies’ that are looking for loans are enjoying a borrowers’ market and pricing is becoming increasingly squeezed as chronically underlent banks  offer lower pricing to win scarce mandates.

“Banks are looking everywhere to deploy capital across the emerging markets – it’s only to be expected that this will start to put extreme pressure on pricing,” a second banker said.

On August 16, Russian potash producer Uralkali (URKA.MM) signed a five-year US$850m Pre-Export Financing (PXF) with international banks which paid a margin of 220bp over Libor, significantly lower than the 325bp the company paid on a US$1.2bn five-year PXF signed in April 2016.

The pricing on Uralkali’s loan is also around 30bp-50bp lower than the US$1bn and US$1.05bn deals signed for Russian coal miner SUEK [SUEKM.UL] and metals business Metalloinvest [MTALI.UL] in May, bankers said.

Russia’s success lies in its continuing economic stability despite all that the market has thrown at it in recent years - from Western sanctions to falling commodity prices.

“Steel and iron ore prices have gone up - Metalloinvest has just said it is not increasing its accordion feature, it doesn’t need it. Evraz (EVRE.L) does not want to do a new loan either, we will have to look elsewhere for new business,” said a third banker.


The Middle East has been caught in a perfect storm of events, which has led to a drought of deals this year, although loans supporting a wave of regional privatizations could boost fourth quarter volume.

In addition to low oil prices curbing growth and appetite for new cash, the bond markets have provided stiff competition as cash strapped sovereigns that tapped the loan market last year have turned to the capital markets for funds.

Saudi Arabia raised a US$12.5bn bond in late September and Abu Dhabi raised US$10bn in early October.

Sanctions imposed on Qatar by its neighbors Saudi Arabia, Bahrain, UAE and Eqypt - which severed diplomatic and transport ties in June - could potentially cause further disruption in the Middle East loan market as international banks are asked to take sides in the dispute.

“It will not be as easy (to lend) as it used to be, attitudes are different, UAE banks have not openly said banks can’t lend to Qatar, there has been no formal change of policy, but international investment banks are coming under more pressure not to be seen lending to Qatar,” a banker said.

The last significant loan in the region involving international banks was a US$1.75bn deal for Saudi Electricity Company (SEC) 5110.SE that was signed in early August. Bankers described pricing on the deal as tight.

Several bankers said that they are unable to participate in a current circa US$6bn loan in the market for state owned Abu Dhabi National Oil Company (ADNOC) [ADNOC.UL] due to its pricing, which is expected to be around 50bp over Libor.


African deal flow also has also taken a severe hit this year with volumes for the first three quarters of 2017 coming in at just US$14.4bn - 49.3% lower than the US$28.3bn raised for the same period in 2016.

The third quarter was shored up with the annual financing for Ghana’s Cocobod – which this year totaled US$1.3bn loan to cover financing needs for its 2017/18 cocoa crop.

Despite the significant downturn, bankers remain bullish about the prospects for Africa with 48% of delegates at the recent Loan Market Association conference in London predicting that Africa would provide the best loan opportunities in the developing markets over the next 12 months.

Bankers cited the increasing sophistication of the African loan market and the stabilization of commodity prices as two of the main drivers of growth.

Editing by Tessa Walsh

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