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Arab project finance goes local on Europe debt woes

Arab governments and companies are relying more on domestic banks, export credit agencies and bond investors to finance projects as Europe’s debt crisis prompts European banks to curtail lending in the region.

Syndicated loans in the Middle East have plunged 72 percent so far this year to $17.5bn from $62bn in 2010, data compiled by Bloomberg show.

The number of Middle Eastern banks among the top 10 lenders has risen to 5 so far in 2011 from 3 last year, with National Bank of Egypt rising to the top of the table, according to the data.

“European banks, which historically played the biggest role in project finance as they began lending to the oil and gas sector four decades ago, have significantly reduced loans since 2008,” the chief executive officer of ACWA Power International, the Saudi developer of electricity and water projects, Paddy Padmanathan, said by email on Nov 15.

“Very large transactions, previously funded by commercial banks, are now more reliant on export-credit agencies. Going forward we will see project bonds becoming more significant.” Europe is battling a debt crisis that so far has cost five leaders their jobs, including Italian Prime Minister Silvio Berlusconi. German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules, as the crisis that began in Greece in October 2009 sent Italian and Spanish borrowing costs to euro- era records.

ACWA attracted 60 percent of the $2.25bn it had to raise for a plant on the east coast of Saudi Arabia from local banks and 30 percent from export credit agencies, according to Padmanathan. Only 10 percent came from European banks. ACWA expects to close financing for the $2.95bn, 3,900 megawatt Qurayyah plant in about a week.

“European banks were some of the first in the region” to provide funding for projects, Mohammed Ali Yasin, chief investment officer at Abu Dhabi-based CapM Investment, said by phone on Nov 15. “With the debt crisis, we will see them participating less, or not at all. If it’s a big project, they’ll be even stricter as to how much they will leverage.” Gulf oil producers Saudi Arabia, Kuwait, Qatar and the United Arab Emirates, which account for more than half of the oil supplied by the Organization of Petroleum Exporting Countries, will need a variety of financing options for large projects such as multi-billion dollar power plants to meet soaring demand for electricity.

“Multi-billion dollar deals will need multiple sources of finance, and multiple tranches,” Richard Palmer, a structured finance adviser at Abu Dhabi government-owned investor Mubadala Development Co, said on Nov 14. “Projects will have to include bonds, and direct lending from export-credit agencies such as the Japanese and the Koreans.”

Qatar Petroleum’s Barzan natural-gas project, a venture with Exxon Mobil Corp., may tap project finance bonds, Jonathan Robinson, the bank’s head of project finance in the Middle East, said in September.

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