It is pushing everything from a major new real estate development, the Bahrain Financial Harbour (BFH), to an ever-stronger regulatory regime to maintain this status (see The Banker, June 2004, page 92). Bahrain’s strong regulatory record is a major plus in the post-9/11 climate of suspicion over financial flows from the Islamic world, allowing it to consolidate its international status in the face of stiff competition from other centres, most notably the ultra-ambitious emirate of Dubai.
More banks are moving onto the island, with the BMA recently issuing licences to banks as varied as a new local/Iranian venture to Bank of China, and there are high hopes for a wide-ranging US free trade agreement, which has been finalised after a speedy six-month negotiating period. With the market awash with liquidity, even the prevailing gloom over the impact of ‘Islamic terrorism’ cannot dull local banks’ appetite.
As bankers prepared for the long, hot Gulf summer, at least three important facilities were signed up in early July. This provided a welcome antidote to a string of dramatic – local bankers say, exaggerated – US warnings for its citizens to “defer” travel and to evacuate some service personnel from the island, which Washington classifies as a “major non-NATO ally” and which is home to the US Sixth Fleet. “Bahrain has been alive to Al-Qaeda plot rumours for months, but unlike Saudi Arabia, there have been no actual incidents to trigger such a strong response,” comments one Manama banker.
Political developments have not been reflected in market behaviour. During the week some Americans were pulling out, Ahli United Bank’s (AUB) debut three-year syndication was 55% oversubscribed and the bank increased the loan to $225m from $150m. The lead arrangers – BNP Paribas, Commerzbank and Standard Chartered Bank – each took $15m in a facility that attracted a total of 23 banks on a take-and-hold basis.
One day before, Bank of Bahrain and Kuwait (BBK) signed a $125m five-year facility (up from the original $100m) with 16 regional and international banks, lead managed by Arab Banking Corporation (ABC). Farid al-Mulla, BBK’s general manager and CEO, said the loan would “help finance big projects in Bahrain and the Gulf region”. And one day before that, Bahrain Commercial Facilities Company (BCFC) signed a $35m syndicated loan with seven banks, which Ian Levack, BCFC’s CEO, said was “for general corporate purposes, largely to refinance our previous borrowing”.
Emphasis on probity
Such levels of business are being mirrored in the Islamic banking sector. Bahrain hosts 28 Islamic banking institutions, 16 insurance, or Takaful, companies and five industry support organisations. The BMA has taken a lead in providing a regulatory framework and the government has helped to create a market in Islamic bonds – issuing short-term Islamic paper monthly since mid-2001 and developing a programme of medium to long-term Ijara Sukuk (Islamic leasing) bonds since September 2001. This has played an important role in promoting one of the global financial industry’s growth areas, Islamic financing.
The BMA’s latest $250m Ijara Sukuk issue – a five-year, floating-rate note lead managed by Citigroup – involved Citi Islamic Investment Bank as structuring adviser, with Gulf International Bank (GIB), National Bank of Bahrain and Arab Bank as co-lead managers. Waleed Rashdan, the BMA’s executive director of banking operations says: “This latest issue [aims] to broaden and deepen the capital market in general, and the Islamic capital market, in particular.”
It was the BMA’s ninth Ijara Sukuk, with these issues so far raising a total $1.03bn. Issued on behalf of the Bahrain government, the bonds benefit from a strong sovereign rating. Standard & Poor’s assigned an independent rating of A- (which is also an S&P sovereign rating) to the Sukuk issue – to be listed on the Bahrain Stock Exchange (BSE), Luxembourg Stock Exchange and Malaysia’s Labuan International Financial Exchange. The latter is associated with the International Islamic Financial Market (IIFM), in which Bahrainis are active.
Bahrain has taken a lead in moves by Middle Eastern and North African (MENA) states to combat money-laundering and “terrorist financing”. The MENA states have agreed to set up a regional body to tackle this, and according to Finance Ministry Undersecretary Sheikh Ibrahim bin Khalifa al-Khalifa, the new body will be based in Bahrain, to be launched at an inaugural meeting in November.
Project finance boost
Bahrain is looking to press ahead with a raft of energy-based projects, and these will help to maintain momentum in a domestic project finance boom, as well as providing more business for the regionally-focused project finance departments of major Bahrain-based players such as ABC and GIB.
The prospect that Bahrain will finally launch private power generation schemes is exciting bankers. Five international groups submitted bids in May for the first independent power project (IPP), a planned $500m facility for 2006 start-up, which will reach capacity of 1000MW by 2008. The contract was awarded in mid-July – a relatively speedy decision by Gulf standards – to a joint venture between Suez-Tractebel and the Kuwait-based Gulf Investment Corporation (GIC) and now has an air of urgency about it, with the realisation that even with the ongoing expansion of the Hidd power plant, Bahrain faces an electricity supply shortage by 2006.
BNP Paribas is financial adviser on the Al-Ezzal IPP, with the UK’s Mott MacDonald as technical adviser and the US-based Freshfields Bruckhaus Derringer as legal adviser. Under a proposed 20-year offtake agreement, the foreign developer will take a 100% interest in the project company, with a view to divesting some of its holdings on the BSE.
In the oil sector, an increase in output from the 150,000 barrel a day (b/d) Abu Safah field shared with Saudi Arabia (whose revenues all go to Manama) will deliver an increase in nominal production during a period of declining output at Bahrain’s self-operated fields.
Manama has increased emphasis on its downstream investment programme, which includes an upgrade of Bahrain Petroleum Company’s (Bapco) 250,000 b/d Sitra refinery, for which a $650m project finance package is being arranged. This comprises a main 12-year debt structure with both commercial and Islamic tranches backed by export credit support.
Bapco also plans an estimated $1.5bn petrochemicals facility at Sitra and a private petrochemicals project, backed by a major regional Islamic investment bank, Kuwait Finance House, is expected to be formally launched later in 2004.
Regional relations
Bahraini banks are looking to promote a regional role in the Gulf Co-operation Council (GCC) and wider region. In a significant recent move, two of Iran’s largest public sector banks, Bank Saderat and Bank Melli Iran, agreed to merge their operations in Bahrain, Qatar and Oman into a joint venture with AUB. The three shareholders will each take one-third stakes in the new Manama-based Future Bank, which will have initial paid-up capital of $99m, authorised capital of $200m and is licensed by the BMA for a full range of commercial and investment banking activities.
Future Bank will take over Melli and Saderat’s three branches in Bahrain, Saderat’s offshore banking unit, and the Iranian banks’ businesses in Oman and Qatar. It plans to expand into other GCC markets, and to work in Iran separately from the existing Melli and Saderat operations. Ahmed al-Bassam, licensing and policy director at the BMA, says it will be the first such regional institution. The regional market is already heavily banked and competition is intense, particularly in Bahrain and Dubai, but the new venture will be well placed to finance Iranian imports – huge business for Dubai and several other GCC centres – and to act as confirming correspondent for Iranian letters of credit.
International vision
The dotcom bubble took with it some of Bahrain’s best-known boutique private equity investors, including Bahrain International Bank and BMB Investment Bank, increasing Manama’s focus on the regional market, but Bahrain remains an outward-looking enclave. This is underlined by the $1.3bn plan to develop the Bahrain Financial Harbour as a futuristic real estate development that consolidates Manama’s claims to predominance as a regional financial centre.
Officials are anxious to say BFH is not intended to counter such potential rivals as the Dubai International Financial Centre. In private, bankers are well aware of the need for Bahrain to show it can provide the sort of accommodating environment Dubai has worked so hard to achieve, while also keeping the competitive edge they believe its well-regarded regulatory framework gives Manama-based institutions.
The BFH’s lead designer, Ahmed Janahi – whose family is playing a leading role in the project – believes it will provide a “distinctive development with an unrivalled architectural ambience”. Esam Janahi, chairman of BFH, is “confident that BFH will attract sizeable investments from the region and across the world and will catapult Bahrain into the league of global economic centres such as London, Hong Kong, Singapore and Tokyo”. If he is right, Bahrain will be able to maintain its leading edge as the region’s financial capital.
