Banks are asking that corporate clients sign up for extra services before they agree to lend them money, two of the country's largest trading groups claim.
Loans come with strings attached
Banks are asking that corporate clients sign up for extra services before they agree to lend them money, two of the country's largest trading groups claim. The move is the latest technique adopted by banks to boost their fee income while keeping a tight lid on new lending as liquidity remains tight.
"Borrowing is still quite difficult," said Robby Zahr, the corporate treasurer at Al Jaber, a large Abu Dhabi family conglomerate. "You must offer some bilateral or reciprocal business. It is very important to get financing." Banks increasingly want to win extra business from clients when negotiating bilateral loans, or in small club deals. That can include treasury business - where the bank can help the company with its hedging, for example - advisory business, or export-import financing.
"They want to see that you are committed to stay under them," Mr Zahr said. "They want you to assure them that they are not only going to earn interest margins." Banks have been seeking higher margins since the financial crisis drained liquidity from the region and made global creditors more risk-averse; a situation that has been further aggravated by the US$22 billion (Dh80.8bn) debt woes at Dubai World.
Apart from more follow-up business, banks are demanding more collateral and more evidence of cash flows and returns. They also want to know exactly how the money will be used when extending loans, companies say. "Counter-party risk is thoroughly assessed rather than giving blanket corporate loans," said VP Nagarajan, the executive director at ETA, one of Dubai's largest family-owned groups active in regional trading. "2009 was very tough and some covenants came under stress."
Covenants refer to the loan-to-equity ratio of a company over the duration of a loan. Banks now demand far tighter covenants than before the crisis. Mr Nagarajan said the debt restructuring announcement at Dubai World had thrown a recovery in lending back by at least another six months. "Dubai World did not affect the margins themselves, but - it had a detrimental effect on banks' willingness to lend in the region," he said. "The conventional market has almost dried up to corporate risk."
Syndicated loans, where a group of banks issue a loan and then divide it up and sell it on to other banks or investors, are also becoming scarce, companies say. At the peak of Dubai's economic expansion in 2006 and 2007, companies based in the emirate broadened their borrowing base to international banks that were keen to lend to Gulf names. Until September 2008, companies in the region typically paid between 40 and 50 basis points above Libor - the London interbank offered rate - or Eibor, its local equivalent.
That spread has widened to up to 350 basis points, depending on the company, Mr Zahr said. "Today the spread is something you cannot bargain about. Getting a loan is a question of availability, not of pricing," he said. Bank guarantees are also making borrowing more costly. Many international banks have started to ask for bank guarantees when issuing a loan, adding another layer of cost for the corporate borrower.
"International banks want to lend to us but don't want to take the risk," said Mr Zahr. He said Abu Dhabi banks provided such guarantees. "They are happy to take the risk, but don't do the funding." Some companies are looking for alternative sources of funds such as export credit financing, as conventional loans dry up. firstname.lastname@example.org