Mena energy funding hit by unrest

External funding for energy projects in the Arab region has been hit by the current unrest sweeping many Arab countries although a large part of those projects need to be financed through loans, an official Arab study has said.

Internal financing for energy ventures in the Middle East and North Africa is expected to be around 57 per cent in the next few years while the remaining 43 per cent could be sourced from equity capital markets,  bonds and sukuk, and bank loans, the Dammam-based Arab Petroleum Investment Corporation (Apicorp) said in a study sent to Emirates 24|7.

But external funding has so far been limited to almost only bank loans and this means that ratio can be taken to constitute a leverage ratio (long term debt over equity) of 43:57, said Apicorp, an affiliate of the 10-member Organization of Arab Petroleum Exporting Countries (OAPEC).

It said this is a moderate leverage, but still higher than the world’s average of nearly 40:60 for all groups of enterprises.

Apicorp’s figures showed annual demand for loans in the energy sector would be in the range of $41-53 billion between 2011 and 2015 depending on the rate at which shelved or postponed projects will be brought back for financing.

“Our analysis of most recent trends and patterns in external financing of MENA energy investment, which comes predominantly in the form of loans, points to collapsing loan demand in countries impacted by the turmoil and lower supply and higher cost in those not yet seriously affected,” it said.

“Should these trends take hold, the investment recovery anticipated in our latest 2011-2015 review could be jeopardized…… indeed, a significant financing gap, which is likely to be part of a broader contraction in the region’s loan market, seems certain to occur. Such a gap could only be closed if the countercyclical credit policies adopted in the aftermath of the 2008global financial crisis are extended. But, in a time of many new pressing demands on public funds, such support may not be readily forthcoming.”

The report showed that in 2010, MENA external financing, predominantly in the form of loans, reached $101 billion for all industry groups representing a mere three per cent of the corresponding $3,412 billion global external financing.

Furthermore, while external financing for the global ‘energy’ group represented

24 per cent of the world’s all industry groups, that for MENA accounted for 44 per cent due to the more fixed-asset-intensive nature of the region’s investment.

In the Gulf Cooperation Council (GCC), which is responsible for 79 per cent of all MENA external financing, this share is a bit higher, the report said.

“The predominance of loans in external financing of projects in MENA stems from the fact that despite rapid expansion of domestic capital markets, their role as a source of financing is still embryonic,” it said.

“Raising external equity in the stock market, through initial public offering (IPO) or the issuance of additional common shares, may not be the preferred strategy

of many corporations, particularly the family owned conglomerates, for fear of dilution of ownership if not loss of control….in the group of industries we dubbed ‘energy’ a handful of corporations are listed and among them only one can be said to have recently been involved in raising capital in this market.”

According to Apicorp, among other alternative sources, MENA private equity funds, despite crowding the market, have little to show in the energy sector.

“Therefore, we will assume that the bulk, if not the totality, of external financing available to MENA energy projects is in the form of loans and credits and that this pattern will remain valid in the medium term,” it said.

“Accordingly, external financing will continue to be supplied by local and foreign banks, multilateral and regional development banks, as well as government-backed export credit agencies and domestic development funds.”

A breakdown showed that on an accumulated basis up to 2010, nine countries – Saudi Arabia, UAE, Qatar, Egypt, Oman, Iran, Algeria, Kuwait, and Bahrain –accounted for 98 per cent of total loans to the region’s ‘energy’ sector.

In 2010, however, only four countries needed or could have access to the loan markets, namely Saudi Arabia, UAE, Egypt and Oman, the report said.

It showed Saudi Arabia, the world’s oil powerhouse, led the region in terms of volume throughout the decade up to December 2010.

In 2010, the Kingdom accounted for nearly 55 per cent of the region’s total with $24 billion worth of deals, the report said.

It said the level is the highest annual volume on record, 60 per cent of which was for only one project – Satorp. Although present in 2010, the UAE could have had greater access to the loan market if not for the sequel of Dubai’s debt troubles.

So far during 2011, available data point to fewer deals and much lower loan worth. “Not unexpectedly, the supply of credit to countries affected by the turmoil has declined drastically if not discontinued altogether, partly due to collapsing demand but mostly because of heightened political risks,” Apicorp said.

“Obviously, these countries include Yemen, which nonetheless managed to sign a deal at the very onset of unrest in early February. Otherwise, only five countries, namely UAE, Saudi Arabia, Qatar, Oman and to a very small degree Jordan, have continued to be present in the loan market.”

The report showed that in total, nine deals have been signed and one closed, amounting altogether to $4.6 billion during the first half of 2011 compared to 11 deals amounting to $18.5 billion during the same period of 2010.

A further indicator of more challenging market conditions is a perceived increase in the cost of borrowing, the study said.

“Such perception may reflect the expected uppricing of risk in the region. The most recent and only data available in this regard point to loan margins of between 175 and 200 bps for deals in UAE and 300 bps in Jordan,” it said.

“On average, this is a little higher than the already high 185 bps achieved in the second half of 2010. above, the evidence, however scant, suggests a serious

contraction of bank loans and sustained high prices….furthermore, the most recent downtrend in the fourth quarter moving average of the share of non-MENA loans implies that foreign banks are reluctant to take on more country risk.”

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