The reluctance of local lenders to join the $3 billion loan for Abu Dhabi National Energy Company (Taqa), which is in general syndication, is highlighting how previously liquid local Middle East banks are being priced out of the market as low oil prices finally begin to bite, according to bankers.

The deal had already attracted $3 billion of commitments before general syndication, but has struggled to draw in any further banks because of tight pricing and concerns over the company's underlying financial health, the bankers said.

Pricing on the facility starts at 50bp over Libor, which is below the level at which local lenders can participate in loans.

"Local banks' funding cost is getting too big to do these aggressive deals," one of the bankers said.

A second banker said that the deal is the first indicator that borrowers have pushed things too far: "This should have been around 80bp minimum."

Moody's downgraded Taqa’s underlying credit rating on June 22, due to the company's weakening financial profile, which has given banks a further reason to pause for thought before participating in general, the bankers said.

A Taqa spokesperson declined to comment

PUSHED OUT

Local banks will increasingly retreat from some of the more aggressively priced deals as they struggle with both their higher cost of dollar funding and the erosion of their deposit bases.

"A deal priced at 100bp is very aggressive for local banks as it is, but if their cost of dollar funding has increased from 20bp to 30bp they will struggle," said the first banker.

With oil export revenues in decline, many government entities are now beginning to dip into their bank deposits to fund projects, the financing for which had been based on a certain level of oil revenue.

"There have been several transactions in the last few months that local banks would normally have done and they have surprised us because they can't do these deals - we will see more of that," the first banker said.

Local banks have been riding on a wave of liquidity and in recent years have successfully stolen market share from international banks on deals in the Gulf region. Many international lenders had retreated from the Middle East after being burned during the financial crisis.

This year, Gulf lenders have also been increasing their footprint outside their home markets into Asia and Africa on deals such as an $85 million loan for Stanbic Bank Uganda and a $235 million deal for South African bank FirstRand, which was syndicated to nine Gulf lenders, with Emirates NBD as sole arranger.

However, the second half of 2015 could well see a reversal of this trend if there continues to be downward pressure on pricing.

"Our cost of funding is going up; we need better returns. We are being squeezed as hard as we can," said one banker at a Middle East based bank. "In order to keep local banks involved we need better pricing in deals."

Bank of Tokyo-Mitsubishi, National Bank of Abu Dhabi, BNP Paribas, First Gulf Bank, HSBC, Mizuho, SMBC and Societe Generale have already committed to Taqa’s loan, which could close as soon as next week. - Reuters