Wealthy seek deals in the Middle East
Investors are getting keen to buy structured guarantees
Despite the crash in oil and property prices, families in the Middle East remain remarkably wealthy. But, all too often, their money is stuck in the wrong place.
According to one intermediary: “When I bring them deals, people want to know why they should help me with my problems. They are more interested in refinancing old deals than agreeing new ones.”
However, this means banks are getting opportunities to win refinancing business. Arrangements struck by individuals with local banks are often unsophisticated, providing scope for more elegant solutions.
One banking source said: “Recent cases in the news will open the eyes of lenders to better scrutinise finances and governance structures, when deals are financed on the strength of family names. There will also be refinancing opportunities.”
Barclays Wealth declined to comment on specific refinancings. However, Soha Nashaat, head of its Middle East and North Africa division, said risk appetites were returning: “I have 40 relationship managers in the Middle East and I would like to get to 50 or 60.”
She added: “More than ever, you need to know exactly what your clients want. And this means we need to work closely with Barclays Capital, more so here than anywhere else in the world.”
Boutique Crossbridge Capital is developing its own banking skills, according to founder Tarek Khlat: “We have hired Walid Fakhry from JP Morgan to head merchant banking, to help develop relationships.”
Institutions with private banking arms are well placed to win Middle East business, given that companies – and governments – tend to be family controlled. This is often the case in other emerging economies, notably in Latin America
During the credit boom, banks made the most of Middle East opportunities by selling families structured products. Youssef Kabbaj, for example, was reputed to have been one of Goldman Sachs’ top fee earners after selling billions of dollars of collateralised loan obligation equity tranches to Middle East investors, although Goldman Sachs declined to comment. Kabbaj is now head of strategy for the region at asset manager GLG.
Banks were equally good at persuading people to access the credit market to fulfill corporate ambitions. Now banks are getting tough on borrowers, disputes are blowing up over who owes what to whom. Facilities are more short-dated than you might expect as a result of the immature nature of the Middle East debt market.
Concerns over transparency and liquidity mean high-quality bonds, such as those issued by Qatar Telecom, are trading at a 300 basis-point premium compared with equivalents in the west.
Liquidity in the previously buoyant Islamic-approved sukuk market has contracted. The situation started to deteriorate in 2007, when a prominent scholar argued 85% of issuance was unlawful. The credit crisis made the situation worse. Defaults by such issuers as US-based East Cameron Partners have appeared.
The economic situation in Dubai is particularly difficult, as a result of a 40% crash in property values, which has hit companies in the orbit of state-backed Dubai World. In February, the regional central bank in Abu Dhabi was forced to inject $10bn (€7bn) into the emirate.
This month, Saudi conglomerate Ahmad Hamad AlGosaibi & Brothers filed a $10bn claim against Saudi billionaire Maan al Sanea, whose wife is a member of the conglomerate’s AlGosaibi family. Both groups are in the middle of restructuring their debts, a portion of which are owed to Dubai-based Mashreqbank.
Trying to get to the bottom of this kind of relationship between Middle East institutions and individuals is tough, unless you are on the family circuit.
What is more certain is that individuals who feel let down by their banks are unforgiving. One intermediary said: “They weren’t impressed by western financiers at the outset, and they certainly aren’t now. And never underestimate how families talk to each other about their bad experiences.”
Several deals in the UK backed by the Qatari royal family have ended in disappointment. Saudi Arabian Prince Alwaleed bin Talal rescued Citigroup in 1990 and became a 5% shareholder, only to be forced to rescue it again in 2008 to avoid being diluted.
The good news is he can afford to do so. Middle East families are still worth trillions. Most of them benefit from secure oil and gas royalties or royal patronage. Mike Hollings, investment chief at advisory boutique Matrix Group, thinks top-rated bonds issued in the Middle East offer exceptional value.
Central banks run by officials nervous of their royal masters tend to be conservative. They are reluctant to let money leave the region. Sovereign wealth funds and public sector debt are buttressing local economies.
To buoy Barclays’ capital base, Roger Jenkins, chairman of Middle East investment banking, excelled in securing support from sovereign funds and Sheikh Mansour’s International Petroleum Investment Company of Abu Dhabi.
On selling much of his stake in Barclays for £3.2bn (€3.7bn), Mansour doubled his money. If he was not advised by Barclays Wealth before, he must be using it now.
Barclays Wealth’s Soha Nashaat declined to comment on Mansour. She is upbeat on prospects, although she added it takes time to build contacts: “You need to develop trust, which takes a long time to build. It can take two years. It can take seven.”
Nashaat said clients were becoming keener to take advantage of distress in the property and corporate sectors. After preferring to buy securities in their own right during last year’s crisis, investors are also showing renewed faith in fund structures, including hedge funds and structured notes.
Middle East investors are displaying a strong appetite for structured solutions where banks help clients raise finance against their assets and protect their wealth against a fall in the market.
Khlat said: “Client interest has switched from wealth enhancement to preservation. Where structured products build on this, we can draw on them.” He said interest in corporate opportunities was stronger. Proposed Crossbridge deals range across private banking, telephone companies, geothermal energy and real estate. Khlat circulates ideas across his client network, although he avoids risking offence by auctioning them to the highest bidder.
Khlat and his team of wealth advisers used to work out of Credit Suisse’s offshore Middle East office in London. They have secured 10% backing from Julius Baer, while maintaining a Credit Suisse relationship.
Reluctant to suffer reduced access to clients, Credit Suisse has upgraded their former positions and hired Ali Hammad from UBS to join the London-based effort, plus two colleagues. Its One Bank cross selling initiative works well in the Middle East.
A flurry of banks have started operations in Saudi Arabia, including Nomura and UBS, which has a partnership with local equity house MerchantBridge. Barclays Wealth expects to open an office soon.
UBS Saudi head Mohamed Sammakia said: “Saudi Arabia is a very important market for us and we have close relationships with the Government and many state entities as well as a number of high net worth individuals in the kingdom who want to work with us and are very helpful opening doors for our business.”
Nashaat
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