Mid-East project finance costs rise on credit crunch

21 January 2008 16:01  [Source: ICIS news]

ABU DHABI (ICIS news)--The US credit crunch is changing the financing environment for new petrochemical projects in the Middle East, a leading banker said on Monday.

 

Appetite for risk has tightened although the Middle East financial sector has limited exposure to the US, said Darren Davis, managing director and head of Middle East and North Africa (MENA) projects and export finance at HSBC.

 

Speaking at the GCC 11th Industrialists’ Conference, he pointed out that the going would be difficult for marginal projects as the pricing of finance had increased.

 

“But it is not a disaster; there is still an enormous appetite [for project financing],” he said.

 

“New [petrochemical] projects in region have become more complex and need larger investments. Cracker costs have doubled and cashflow is stretched more thinly, he added.

 

“Five years ago, projects were 30% financed by equity and 70% by debt, which is almost impossible now. The economics do not support that amount of debt now,” he said.

 

Project sponsors are now taking more risks and lower returns are being accepted, he said, adding there would be more aggressive borrowing terms for projects that do proceed.

 

Davis predicted that some major projects could be deferred due to high costs, and that private sector projects in the region were at greater risk.

 

Some companies would take a different strategy, he said.

 

“Acquisitions outside the region will accelerate. I believe this is an excellent time to be acquiring in petrochemicals. Buying now will provide you with immediate cashflow and the opportunity to exploit benign petrochemical market conditions,” Davis said.

 

“If you build, there will be no cashflow for three years."

 

The conference, organised by the Gulf Organization for Industrial Consulting, runs from 20-21 January.

By: Malini Hariharan
+65 6780 4359

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