CONTEXT AND TRENDS
While the UAE was not directly impacted by the unrest which engulfed the Middle East in 2011, it is has still been dealing with the fallout from its own property crisis. "We still see a variety of restructurings in Dubai and Abu Dhabi....
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CONTEXT AND TRENDS
While the UAE was not directly impacted by the unrest which engulfed the Middle East in 2011, it is has still been dealing with the fallout from its own property crisis. "We still see a variety of restructurings in Dubai and Abu Dhabi. That stream of work has not really abated. Some thought it would disappear, me included, but there are a number of ongoing cases such as Nakheel and the Drydocks," notes one practice head.
Although the distressed work continues, on a more positive note, banks are lending again, albeit somewhat selectively. As is the case across Europe, only reliable borrowers can get good credit. "True new money deals are limited in number," observes one partner, explaining: "The mid market in some ways has disappeared. In the height of the boom mid market companies could get into syndicated credit facilities quite easily, but it's just not possible anymore." There are exceptions, however and those borrowers with the security of ECA backing have been able to secure financing. There is a culture of amend and extend among banks financing smaller borrowers as the countries archaic insolvency law does not allow for restructuring in all but extenuating circumstances. "The insolvency law here isn't really designed to allow companies to recover from a difficult situation," says one partner. While there is no current equivalent to the UK's scheme of arrangement - other than the dispensation to a special decree that was brought in for Dubai World's subsidiaries, which has been used by the dry docks to cram down some hedge funds and dissenting creditors - a draft insolvency law currently sits with parliament. The fundamental proposal in the draft is for the inclusion of a mechanism, which allows for a clamp down to be imposed on non-consenting creditors if there is majority consent. Lawyers are optimistic the law will be implemented. "It's got far enough through the system," observes one.
With both financings and refinancing, in a bid to circumvent the lack of liquidity in the market, a trend that began two years ago continues, as lenders are obligated to tap both conventional and Islamic banks to maximise their revenue streams. A more recent development has been the tendency for banks to issue structured bilateral deals with security.
From a project perspective it has been a quiet 12 months in the UAE. The one hope for the domestic market was pinned on the success of Dubai's first PPP (public-private partnership), the 1500MW Hassyan IWPP for Dubai Electricity and Water Authority (Dewa). To the dismay of most involved, however, Dewa unceremoniously pulled the plug after two years, deciding it could meet additional demand requirements without adding capacity. "The trend was, Dubai projects were looking up as a result of Hassyan, but the demise of Hassyan has had the opposite effect, especially on government backed projects," says one lawyer. The decision was particularly strange given Dubai had gone to the trouble of amending its legislation to permit IWPPs in June 2011. Needless to say, the project's cancellation dampened the prospects of the emirate revealing a draft PPP law, which was rumoured to be on the table this year.
In Abu Dhabi too, the PPP market has stalled. "Every year we were a doing a PPP transaction, in the education space particularly, but that's all come to halt now," says one projects partner. Ostensibly, the government, which was attracted to PPP model by the promise of private sector efficiency rather than the finance, is considering whether it wants to continue developing projects in this manner. "They have been having a rethink to see if it's getting them what they want. I think the government are split on it. The road project (the Dh10 billion ($2.72 billion) Mafraq-to-Al Ghweifat road which was set to link the country with Saudi Arabia) they were doing died a death last year. They spent a long time on it but I think they picked the wrong project, it was too big," explains one lawyer. "It was always going to be more expensive, you just hope the asset lasts longer, is better built and is operated better if you get a PPP structure in place, but some people in the government couldn't see that," says another. Abu Dhabi is by no means completely inactive when it comes to projects and there are oil and gas and social infrastructure RFPs being put out to tender. Lawyers also note a good deal of activity in the northern emirates in the form of oil refineries and tank farms in Fujairah. A regional trend in regards to projects has been to utilise the sukuk (Islamic bond) market to finance with a project bond. The first project sukuk used in a Greenfield project was seen in the form of the €14 billion Jubail oil refinery deal in Saudi Arabia in 2011.
During the past two years, sukuk has been rapidly growing in popularity, and in 2012 the majority of debt capital market transactions were done on a shariah-compliant basis. "Whereas historically it was probably 70/30% in favour of conventional, I think this year, certainly it's been around 80/20% in favour of sukuk," observes one partner. With the onset of the Arab Spring and Greece's instability, European banks, which had traditionally added liquidity to the regional debt markets by buying bonds, were scaling back their exposure. And with the pricing for conventional issues by GCC (Gulf Co-operation Council) entities into Europe increasing, companies turned to the sukuk market. "You had a nice conflation of events. You had liquidity in the Islamic institutions, which were ready to invest but had very little supply, and you had a desperate need for issuances by financial institutions in the region, corporates and GREs," says one lawyer. Although, as expected, there was a decrease in activity around Ramadan, with the price of conventional issuances still high and plenty of investor demand, lawyers say there is no sign of the use of this instrument slowing down.
On the equity side, the mood is a little glummer. Regional unrest has conspired with issues in the Euro zone to deter any new issuers. "Principally it's a reflection of the market globally not just the Middle East, but the Middle East has been particularly heightened with the repercussions of the Arab Spring and issuers really not willing to come to market," says one lawyer. One notable exception was healthcare company NMC's flotation on the London Stock Exchange. The first time a UAE company has achieved a primary listing in the UK, the deal is expected to encourage others to look beyond the regional exchanges when the markets are less volatile. "I suspect when the markets do open NMC will pave the way for a lot of regional issuers to look to the international markets," says one lawyer.
In the aftermath of the Arab Spring, lawyers report a significant slowdown in inbound and outbound M&A activity in the Middle East. "The number of investments into the region dried up as multinationals took a breath and thought about whether they wanted to be deploying capital in a region that was so volatile," notes one practice head. But, in comparison to 2010, it was a positive year for the UAE. Lawyers suggest that amidst the turmoil outside its borders, the UAE was a beacon of stability to investors. "Regionally there was lot of upheaval but Dubai was one of the beneficiaries. It's been deemed to be progressive, it's been deemed to be stable. People see Dubai as a good place to invest," says one. "Last year was a year when deals actually got to closing for the first time in a number of years," notes another lawyer. Although there was a certain amount of distressed work tied to the local restructurings, the private equity market also improved as buyers and sellers' expectations finally began meeting. "A number of deals haven't come to fruition or are still being looked at but we are seeing quite a lot of interest from private equity and quite a lot of RFPs coming out," says one partner.
What may further fuel the M&A market, is the protracted new company's law, if and when it comes into effect. A draft circulated earlier this year included several notable amendments to the existing legislation. Chief among these was a relaxation on foreign ownership restrictions, which stipulates that at least 51% of a company must be owned by an Emirati national. The draft contained a provision permitting the ratios to be altered on a case by case basis, "at the discretion of the ministry of economy". Lawyers are disappointed the changes weren't more definitive. "It a little bit negative, we had hoped for more wholesale changes, stating certain sectors where the restrictions would not apply for example," says one. Another potential beneficial alteration is the reduction in the minimum percentage a local company must list, which is an impediment to local companies listing on DFM or ADX, from 55% to 30%. Although the draft companies law was approved by the cabinet in December 2011, lawyers are not overly optimistic about it is the finished article. One partner says: "We're not sure when it will come into force, if at all. If it does, we're not sure whether it will be in the same form as the draft that is kicking around." The latest reports say it's under review.
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