Islamic syndicated financings underwent a major uptick in volumes fueled by buoyant loan financing markets in the GCC, underpinned by strong deal flows across the Kingdom of Saudi Arabia, the UAE and Bahrain. Despite a slowdown across the global markets, MENAT [Middle East, North Africa and Turkey] syndicated loan markets stood resilient in 2022 with strong deal flows, especially across the GCC, on the back of strong liquidity among banks, high oil prices and a favorable macro–micro environment backed by local, regional and international investor appetite.
MENAT’s syndicated loan volume year-to-date (YTD) for 2022 stands at circa US$111 billion, with an additional circa US$20 billion-plus of deals closed or expected to be signed by the end of the year, including the Public Investment Fund’s US$17 billion deal and Ministry of Defence Egypt’s US$2.5 billion deal.
The year is expected to close flattish to the financial year (FY) of 2021 — which was a record year for MENAT, clocking a total syndicated loan volume at circa US$151.6 billion on the back of a sharp post-COVID-19 recovery (+ 83% vis-à-vis the average annual volume between FY 2019 and FY 2020).
Review of 2022
Key themes witnessed in FY 2022 were the following:
• Strong liquidity dynamics within the GCC banking system led to fierce competition on deals leading to margin and fee compression.
• Departure of the underwrite-to-syndicate model toward large-scale club and bilateral financings.
• A number of GREs, blue chips and established corporates consolidated and refinanced their debt stacks with favorable maturity, pricing, security and covenant profiles.
• Uptick in acquisition financings, particularly in the infrastructure space driven by strong cross-border investor appetite in performing local and regional assets.
• Focus on bridge structures, driven by IPO-linked financings on the back of progressive equity capital markets across the GCC.
• Transition to the secured overnight financing rate, and focus on building the sustainable financing framework across MENAT borrowers.
On the back of (i) increased overall deal flows in the GCC (ii) competitive liquidity dynamics in the local and regional banking system (iii) improved alignment in Shariah boards of local/regional banks leading to shorter documentation/turnaround times on documentation and (iv) increased inclusion of Islamic tranches in large financing across the Kingdom of Saudi Arabia, the UAE and Bahrain, the MENAT Islamic syndicated financing markets witnessed a record year with YTD 2022 volume at circa US$40.3 billion (+49.6% year-on-year (YoY)), representing 36% of the total MENAT loan volume for the respective period.
This was a sharp increase vis-à-vis FY 2021, whereby the Islamic financing volume stood at circa US$27 billion and only contributed circa 18% of the total syndicated loan volume in MENAT; the weak Islamic activity in the respective year was a result of rapidly changing and volatile market conditions, whereby there was a strong preference from the majority of sovereigns, government-related entities (GREs) and corporates for conventional loans primarily owing to the relative ease and speed of structuring, documentation and execution.
• Over the years, GCC countries have remained the top contributors representing an average of circa 82% of MENAT’s total Islamic syndicated loan annual volumes between FY 2018 and FY 2021; this witnessed a sharp increase to circa 96%, with the total GCC Islamic financing volume at circa US$38.8 billion YTD 2022 — a steep increase from circa US$18.8 billion in FY 2021.
• Egypt remains the second-largest contributor, accounting for circa US$8.1 billion in the Islamic loan volume in FY 2021 primarily driven from large-scale Islamic tranches of mega deals executed on behalf of the Ministry of Finance and Egyptian Electricity Holding.
• However, in FY 2022, Egypt experienced a sharp decrease in Islamic volumes to circa US$1.3 billion (-84% YoY), which was in line with the overall slowdown in Egyptian deal flows — primarily on the back of significant foreign exchange volatility and the global macroeconomic impact on the country.
A deep dive into the FY 2022 Islamic deal flow
Within the GCC, Saudi Arabia remained the largest driver of the Islamic loan volume (primarily on the back of a wider Islamic banking sector and local borrower/lender preferences); however, the UAE has consistently ramped up over the years, whereby in consolidation the two countries account for circa 88% and circa 84% of the total GCC Islamic loan volume and the total MENAT Islamic loan volume YTD 2022 respectively.
Major financings completed in FY 2022 in Saudi Arabia which incorporated Islamic tranches include Saudi Aramco’s US$10 billion dual tranche syndicated financing, Saudi Electricity’s US$3 billion financing facility and Advanced Petrochemical’s US$1.6 billion financing, among others.
In the UAE, a number of GREs entered the loan markets primarily for refinancings and IPO-linked financings, whereby a number of mega deals were completed either on a dual conventional and Islamic structure or a sole Islamic structure, including Etisalat’s US$7.5 billion equivalent dual facility, Nakheel’s AED17 billion (US$4.63 billion) dual-tranche financing (largest real estate financing completed in the region), DEWA’s AED10 billion (US$2.72 billion) facility (solely Islamic) and TECOM’s AED7.6 billion (US$2.07 billion) dual-tranche financing facility.
A sharp jump was also witnessed in Bahrain’s Islamic activity after a hiatus since FY 2018, whereby the oil and gas holding and investment arm of the Ministry of Oil, nogaholding, successfully signed its US$2.2 billion sustainability-linked syndicated financing in May 2022, which incorporated a conventional and Islamic tranche.
Preview of 2023 and conclusion
FY 2022 witnessed a sharp recovery in the Islamic loan space, whereby Saudi Arabia, Bahrain and the UAE saw strong representation of Islamic liquidity/banks in milestone financings completed for their top-tier GREs, real estate players and project financings, among others — we consistently experienced competitive bids by local and regional Islamic banks on primary deals, which looked to deploy liquidity in order to meet aggressive asset targets, with a view to recover from the slowdown in Islamic activity in FY 2021 and replenish respective asset run-offs (especially across their GRE portfolios) in FY 2022.
Given a majority of the GREs and blue chips accessed the loan markets this year, taking advantage of the liquidity dynamics, and have solved their medium- to long-term capital requirements, in 2023, we expect to see more of the private players (especially mid- to large-tier corporates) enter the loan space for balance sheet management and to extend maturity profiles and resize covenants/structures primarily due to the increasing rate environment, whereby they would look to follow the present financing trends, and incorporate dual-tranche structures in their financings in order to optimize pricing and liquidity.
While the decline in Islamic volumes in the other GCCs in FY 2022 is in alignment to the overall decrease in syndicated volume in the respective countries, we believe there is a larger role for Islamic liquidity to play especially in Oman where (i) we have recently seen an uptick in loan activity driven by sovereign and quasi-sovereign funding requirements (which have primarily been conventional thus far, whereby a number of conventional banks are now tapped out on limits for the sovereign and GREs), (ii) the pricing challenges and relative inaccessibility to the debt capital markets in the near term may steer borrowers more toward the loan markets to achieve competitive pricing (recently witnessed on Ministry of Finance Oman and foreign investment deals) and (iii) given the improved credit rating, on the back of macro performance, of the country, we would expect more banks to have appetite for the country going forward.
Given the challenges in the frontier and emerging markets, decrease in overall investor appetite and inaccessibility to the debt capital markets, we expect issuers to continue to expand and diversify their funding sources via the loan markets, whereby a further diversification and expansion of their liquidity pool/investors can help in optimizing pricing and size on their upcoming funding requirements. This creates an opportunity for Islamic liquidity to play a key role in FY 2023.
The views expressed herein are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer or company.
Hitesh Asarpota is the managing director and head of global capital markets and loan syndications while Shayaan Khan is the head of loan sales at Emirates NBD Capital. They can be contacted at [email protected] and [email protected] respectively.