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CONTEXT AND TRENDS
Saudi Arabia is the world's biggest supplier of oil. with prices reaching $100 a barrel in 2012, the government is investing in the country, providing opportunities for banks, investors and lawyers....

CONTEXT AND TRENDS

Saudi Arabia is the world's biggest supplier of oil. with prices reaching $100 a barrel in 2012, the government is investing in the country, providing opportunities for banks, investors and lawyers.

Even at the height of the crisis liquidity was never an issue for the Kingdom, but banks grew cautious in its immediate aftermath and up until 2011 there was a hardening of credit for all but the most reliable borrowers. In 2012, however, lawyers report a substantial increase in new money deals and although the bulk of the financings were for blue chips, an number of debut, mid size borrowers also secured credit. "We're seeing a lot of companies both at the top end of the market but also a whole raft of slightly smaller companies which are tapping the syndicated market for the first time," says one partner. While some attribute this upturn to the fact the banks need to "make their money work for them" others feel the volatile nature of the market in 2011 "created a lot of pent up demand". Significant club deals for government related entities with long tenures and little or no security are still the mainstay for most banks and practices. As far as the dynamic of lenders is concerned, one notable change has been the growing dominance of domestic institutions. "We have been refinancing big syndicated deals which were originally done four and five years ago with a mix of dollars and Saudi riyals through a combination of local, GCC and international banks. All these deals have been refinanced entirely by local banks which just highlights the rise of Saudi banks and the decline of the European banks," says one partner.

The most buoyant area of capital markets work in Saudi Arabia has been sukuk (Islamic bond) with over €10 billion worth issued by Saudi entities in the first half of 2012. Three key factors have contributed to the popularity of the Islamic instrument: (i) the cost of securing a good international bond rating is expensive; (ii) European banks, which traditionally brought Middle Eastern bonds, are looking at divesting rather than investing; and (iii) there is huge amount of demand for Islamic paper given how liquid the local banks are and how low interest rates are. "Right now in Saudi it's quite easy for company with a reasonable accounts to put together a sukuk structure and get it away at pricing which would be very difficult to achieve at an international level", says one lawyer. Another partner agrees: "Margins are low, there's excess of liquidity in the market and the people who are going to deploy the money are looking for fixed income. The future projections are that interest rates are going to remain below 1% for the next three to five years but they can get getting anywhere from 95 to 100 basis points on these sukuk deals."

Despite the regional unrest and the wider macroeconomic issues in the Euro zone which have blighted international markets, the Tadawul (Saudi stock exchange) has prospered. "We're still seeing a good supply of RFPs from banks and issuers so the pipeline is looking good - it still remains an attractive market," says one partner. With the government pouring money into developing the economy, local businesses represent an appealing proposition for investors. Among the recent activity two of the largest transactions were Zain KSA's SR6 billion ($1.6 billion) rights issue and Saudi Airlines Catering Company's IPO which raised SR1.3 billion (approximately $362 million). Some of the transactions have been by companies which are obligated under law to IPO such as those in the insurance or telecommunication sectors and lawyers expect this type activity to continue. "I think we're going to see a flurry of greenfield finance leasing companies or maybe a couple of insurance companies over the 12 to 24 months. Some of that work is attractive because you want to get close to those issuers," notes one partner.

A further boon for the capital markets came in February when the new listing rules were introduced. "The revised listing rules are a lot more robust specific and detailed on issues that were otherwise vague on the previous set of rules," notes one partner. Although, largely a case of codifying existing standards such as handing any due diligence over to the CMA prior to transaction, it also introduced some new possibilities. The amendment which has attracted most attention is the introduction of provisions permitting cross listing, essentially, enabling a company which is listed on an international exchange with similar rules to the Tadawul to list on the Saudi exchange. Although to date no one has taken advantage of this new rule what is more interesting than the rule itself is what it may indicate in terms of the further evolution of the market. "If you look at the trend started back when the CMA was first implemented, local shares were only open to Saudi nationals and then it was opened further to allow children born to Saudi mothers and without Saudi fathers. Then it was opened to residents that can buy through funds. Then it was open to foreigners who were allowed access through swaps and now with the cross listing you see that step by step the government does recognise the need to allow new money to come into the market. And they need to be listed as a developing company and to do that they have to have an open the market," says one partner. Given the MSCI has indicated that if foreigners are allowed to list on the exchange it will be upgraded from frontier to emerging market, which would be massive boon for the economy, there are suggestions that this latest move is step towards the complete liberalisation of the Taduwal. Currently nothing has been substantiated but there are rumours that further reforms are being considered. "There's talk of dual listings allowing non Saudi companies to list a portion of their companies in Saudi. Because the investor base tends to be in this region people are looking to tap that," notes one lawyer.

With the economy thriving, the government is financing projects. Energy and petro-chemicals continue to provide mandates for international firms. "There's always been a steady diet in the power sector. On the pet-chem (petrochemical) side there is still a bit going on," notes one peer. While work has been progressing in the Economic City, it is advancing slowly. There is still an emphasis on diversifying away from a dependence on oil which has seen projects such as the Ma'aden Aluminium Mine and Refinery pushed through. Healthcare is still prominent on the Royal Family's agenda and a number of hospitals are being developed all over the country.

Saudi's M&A activity is currently divided into two areas: joint ventures and private equity. The bread and butter of Saudi corporate practices, joint ventures are the only way for non Saudi nationals to enter the market. Recently there was an announcement by the newly appointed governor of Sagia Alaha that a minimum investment requirement of €50 million may be imposed on all foreigners wishing to strike up a joint venture. Lawyers say there could be several motives behind introducing this rule. "I think maybe it's a case of wanting to have more Saudi led and Saudi owned businesses because there is a perception that if you are a Saudi led business you are going to be more sensitive to employing more Saudis and helping with the unemployment issues which the country is facing. I think there is also a view that there is plethora of entities that have been foreign licensed and noone knows exactly what they do, if they do anything. So there is a view that this encourages corruption to get these licences and then they just become dormant," speculates one.

On the private equity side, there has been interest in the fast food sector. The Carlyle group's acquisition of a 42% stake in Alamar Foods, owner of the Domino's and Wendy's franchises in Saudi Arabia, is the most notable example. Consumer goods and retail are other attractive industries. The demographic of Saudi society has been the driver for these investments. "It's due to the fact a large percentage of the population are under 30," notes one lawyer. "You have a population with a high disposal income and if you look at the youth a lot are educated abroad and expect to find in Saudi what they have done internationally," he adds. Other targeted sectors include those where the state is investing such as healthcare and infrastructure.

M&A lawyers also note that financial services has been an interesting area. "Foreign banks with Saudi interests are looking to strengthen their balance sheets and deciding whether to sell these stakes because they are noncore or to increase them so they are core," says one partner.

The biggest legislative development during the past 12 month was the passing of the mortgage law in July 2012 after a decade of discussions. Aside from the massive social benefits the law will have for locals, when fully implemented it is also expected to stimulate the retail housing market and financial services sector. "We've seen an interest in the sector of home loans and home construction, but particularly in the financing sector and we've been involved in a private placement there. Clearly what we might see is an interest in setting up specialised mortgage banks," notes one lawyer.

MAJOR LATERAL HIRES

Douglas McBroom
From: Al Tamimi & Company

Grahame Nelson
From: Qays H Zu'bi Attorneys & Legal Consultants
To: Al Tamimi & Company