Kuwait's Al Anba'a newspaper reports that Zain is in discussions with non regional banks for a loan of between US$500 to US$600 million to finance the development and extension of the network of Saudi Zain in the Kingdom. The reason for the recourse to foreign lenders is ascribed to "tight" lending conditions in the GCC. You've probably seen all this reported elsewhere.
But, there's an element to the story that you haven't probably seen.
The "bit" that many news reports have left out is that the negotiations are being facilitated by equipment suppliers to Zain. Most of whom are European. And thus the assumption is that the banks involved are European.
Does this indicate anything about Zain's financial condition?
As mentioned above, the ostensible reason for the recourse to foreign lenders is that local banks are imposing very complicated conditions and requirements for guarantees due to market conditions and due to tighter supervision by central banks. The unspoken sub-theme is that the credit of Zain is sterling. But that its access to financing has fallen afoul of external conditions.
No doubt lending conditions are tighter in the GCC. Lots of distress with AlGosaibi, Saad, Dubai World has probably focused previously unfocused minds.
Unmentioned is the simple fact that Zain Saudi has not turned in stellar performance. Also unmentioned is that it did not make the EBITDA earnings target covenants under its existing loan. Or that existing lenders on that facility had to grant a waiver to remedy an event of default.
Any foreign lender should exercise caution when it is told that the local banks don't understand the credit, aren't as sophisticated as the foreign bank, are over reacting to market difficulties, or under pressure from allegedly strict regulators. While it is nice to be told that one is smarter than others, sometimes a "great" opportunity to take advantage of others' lack of sophistication and nerve is not so great after all.
If a prospective lender also notices that the borrower needs to enlist help of others to secure financing, that may also suggest additional caution is prudent. If the borrower cannot find any banks who "know" it who are willing to lend (and note the article says that negotiations with local banks for financing this new loan have stopped), then could be another red flag. Having said this, once a firm I was with extended a financing offer to a prospect whose lead bank was unable to providing financing, though this was a skill set deficit not a credit issue. We then became the lead bank.
Equipment suppliers have a keen interest in moving their merchandise. And to the extent they can lock in a buyer to their equipment or increase "switching costs", all the better. When their customers can't raise financing on their own, suppliers first turn to other sources of credit, e.g., export credit agencies, and financiers they know. Often leaning on those sources to do the deal, explaining just how important it is to them and promising they won't forget. Sometimes, as a last resort, they will even take the receivables on their own books. During the "Asian Century" (which if I remember correctly began in the early 1990's and abruptly ended in 1997, though I believe it may have restarted again in 2009) one French and one US supplier found themselves later to their financial chagrin with a lot of duff receivables - which may in part have motivated a merger.
Another bit of information in the article which may be an indication of distress (though it need not necessarily be) is the statement attributed to the CEO of Zain Saudi, Saad AlBarak, that Saudi Zain was not "rescheduling" its existing murabaha loan but merely "refinancing" it.
A refinancing certainly sounds much better than a rescheduling. A rescheduling implies all sorts of problems. A refinancing, well that's just the rollover of a great asset.
The devil is as usual in the details. If the existing lenders were to say "no", is the alternative a rescheduling? Are there any new lenders ready to step up and "take out" some or all of the existing lenders? Sometimes when a bank is stuck in a credit, it "refinances" rather than "reschedules" because reschedulings raise all sorts of messy problems. First, there is the need to report restructured loans under IFRS. Auditors may insist on impairment tests. Provisions may become necessary. Second, as a general rule, Central Banks get nosy about rescheduled loans and start asking about provisions as well. Third, equity analysts may form unfortunate conclusions if restructured loans increase. Something one might want to avoid if one faces other loan problems. Fourth, clients and depositors may get nervous.
And sometimes a refinancing is just that - bankers renewing a performing asset that they are happy to have on their books.
So, to be clear, all of the above do not prove there are serious problems at Saudi Zain.
What they do suggest, however, is that a closer look at the company is warranted.
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