Credit markets are sending a harsh message to Gulf companies slowly emerging from the global financial crisis and now seeking expansion opportunities: line up your best assets as collateral to secure financing. The sovereign debt troubles in the euro zone, sluggish growth of the global economy and a recognition that they may have lent too freely in the past are prompting banks to become more cautious in their lending, and to demand tangible assets as backing for loans rather than implicit guarantees. "The financing environment currently is certainly not conducive for borrowers in the region," said Suketu Sanghvi, head of structuring and investments at Essdar Capital, an investment banking and fund management firm in Dubai. "Borrowers will need to put a good credit story or security collateral to raise money in this market. This is expected for most borrowers in the region, and the situation will continue for at least the next six months." This marks a major change in the Gulf, where many corporate borrowers were offered credit for years without having to put up assets as collateral. Loan activity shrank dramatically during the global crisis of 2008-2009, picked up in 2010, and has decreased again this year, Thomson Reuters data shows. "Lending standards appear to have tightened and aligned with lending practices in other regions..." said Martin Kohlhase, senior analyst for corporate finance at Moody's Investors Service. Paul Donovan, chief global economist at UBS, said: "We are in a classic economic environment where we are raising risk, we are raising the cost of capital, and we are reducing the supply of capital. "This region needs to be more dependent on its own sources of funding. It's a challenge that needs to be met." The new constraints on lending could curb economic growth in Gulf in coming years. But they may also make growth more stable, by subjecting corporate borrowers and their projects to more market discipline. "It can be a balancing act of enforcing and maintaining stricter lending standards against the risk of choking off economic growth by being too conservative," said Kohlhase. Loans worth $8.67 billion were extended in the Middle East during the second quarter of this year and $7.57 billion during the first quarter, compared to levels above $10 billion in each of the previous three quarters, the Thomson Reuters data shows. About half of that activity was accounted for by the United Arab Emirates, Saudi Arabia and Kuwait. Quarterly lending in the Middle East is far below record levels above $40 billion hit in 2007. While some of the drop since then is due to lower demand for funds, a considerable portion of it is the result of tighter supply. The trend is clearest for European banks, historically the largest providers of capital to Gulf companies but now struggling under a debt crisis back home and facing funding squeezes themselves. But banks in the Gulf are also worried about managing their exposures to limit loan loss provisions, which have risen since 2008. In the bond market, Gulf credits have not been spared the aggressive selling seen in developed markets in response to the euro zone crisis over the last few months. In the past month, average yields for companies as tracked by the HSBC Nasdaq Dubai GCC Corporates bond index touched a peak of 5.634 percent on Oct. 4, from 4.757 percent on Sept. 9. Companies are feeling the impact. The world's largest shopping arcade, The Dubai Mall, has been offered as collateral by its builder Emaar Properties against an $800 million loan, four banking sources familiar with the deal told Reuters last month. Lending costs have risen sharply, even though central banks in the Gulf have flooded their money markets with funds to aid their banking systems.
