Saudi Mortgage Law to Allow Foreclosures?

So says Reuters according to  Maktoob Business.

As well a prediction that initial lending forays will be for commercial space - which seems to make sense.

It may be socially a lot easier to foreclose on a shop than on someone's residence. 

Dubai Islamic Bank Signs Wakala with UAE Ministry of Finance

Dubai Islamic Bank announced on the Nasdaq Dubai today that "like other national banks", it had signed a Wakala Agreement with the UAE Ministry of Finance.  This is part of the UAE Government's program of providing funding to banks to strengthen their financial resources.  As with the other transactions, the UAE MOF may convert the Wakala Deposit and any accrued but unpaid profit distributions (interest in a conventional financing) to equity in the Bank.

Two intriguing things from this announcement:

1. The agreement was signed on 31 December 2009.  Yet the announcement was only made today 7 February.
2. Apparently, the amount of the Wakala Deposit is a minor detail which need not be disclosed.  At least at this point.

The date of the agreement (just in time for 2009 financials) suggests a pressing need at DIB for additional funds of a capital nature.  AA wonders if the deal was actually signed on 31 December 2009 or if it was signed "as of 31 December 2009".  In the latter case, it may have been signed sometime after 31 December 2009.  And that might explain that the apparent late disclosure was not late after all.  

DIB's Board will meet on 10 February to discuss the fiscal 2009 financials, perhaps another sign that ducks have only  recently been lined up, including this one.

And then again it may just be a case that disclosure standards differ from those AA is familiar with. 

Saudi Zain Foreign US$500 Million to US$600 Million Loan - What's Behind the News Item?

 

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.

Novaar Capital Announces JV with Urals Polar

FT news report here.

Novaar's press release on the subject.

HRH Prince Saud Bin Mansour Bin Faisal Bin Saud Bin Abdulaziz Al Saud is the owner of Novaar.

Here's some background on Novaar:

1. An earlier article about its formation.  
2. And here's the registration information from the DIFC website.

Middle East (UAE and GCC) Finance and Investment News

Another blog added to the links of Interesting Blogs and Other Links.

Link here.

Emirates Airlines US$1.3 Billion Financing

The press is reporting that Emirates has raised US$1.3 billion in financing for six A380 aircraft from Citibank and Doric Finance UK.

A couple of observations:

1. The financing is supported by guarantees from the export credit agencies of France, Germany and the UK.  In effect the lenders are not taking financial risk on Emirates or Dubai.
   
2. In most cases, the ECAs require that the loan be structured as a finance lease.  A special purpose entity ("SPE") is the owner of the aircraft and it leases it to the airline.  This is designed to give the ECAs a greater ability to repossess the plane if the airline doesn't pay.  To that end there is a special convention under Unidroit (the so-called Cape Town Convention) which embodies international agreement on this security structure.  More on the Cape Town Convention here.  The UAE is a signatory to the Convention.  The ECAs generally only lend to borrowers from a country that has signed the convention.  And the SPE has to be incorporated in such a country.
3. Also it's important to note that ECAs will often extend credit to borrowers that the free market will not support, either because of concerns about their creditworthiness or the terms of financing (tenors, rates and other conditions).  As government agencies, the ECAs are in the business of promoting their nation's exports through the provision of financing.
   

All this is not to say that Emirates is a bad risk.  But portraying access to ECA finance as a sign of robust financial health is a bit of an overstatement.  

DEWA US$2 Billion Sukuk 1Q 2010

Financial press reports that Dubai Electricity and Water Authority ("DEWA") is planning a bond and/or sukuk issue for 1Q 2010.

This source says that Citibank, Barclays and Dubai Islamic Bank have been tipped to do the deal.  Other market discussion is that the UK bank is Standard Chartered.  Perhaps both are involved?  Stan Chart had a major role in the syndicated loan earlier this year.

A bold move in the midst of a request for a standstill, particularly when DEWA is not a sovereign borrower as outlined below.

The sukuk/bond appears to be new money financing. That is, it is not designed to refinance a maturing obligation.  But rather to secure additional funding.

On 8 April 2009 DEWA announced the closing of a three-year US$2.2 billion equivalent syndicated "Islamic" refinancing loan at 300 basis points over Libor.  This  facility refinanced a one year  "Islamic" loan which had a margin a fraction of the replacement loan.  Later in May DEWA announced a thirteen-year ECA backed US$ 1 billion loan.   Both without a sovereign guarantee.

Also in June 2008 DEWA issued a five-year AED 3.2 billion (US$880 million) with Citi, Barclay and DIB as lead managers.  Again no sovereign guarantee.

From the Sukuk prospectus page 17:

"DEWA’s financial obligations are not guaranteed by the Government
Although DEWA is a wholly owned Government entity and also functions as a Government department providing an essential public utility, it is still an independent commercial enterprise and its financial obligations (including its financial obligations under the Transaction Documents) are not guaranteed by the Government. Therefore, DEWA’s ability to meet its financial obligations under the Transaction Documents, and consequently, the Issuer’s ability to pay Periodic Distribution Amounts and Dissolution Distribution Amounts to Certificateholders is solely dependent on DEWA’s  ability to fund such amounts from its business and operations."

In case you're still catching a glimpse of an implicit guarantee, here's an extract from Note 1 to DEWA's 2008 financials:

"Dubai Electricity and Water Authority (“DEWA” or “the Authority”) was incorporated on 1 January 1992 in the Emirate of Dubai by a decree (“the Original Decree”) issued by H.H., the Ruler of Dubai, effective 1 January 1992, as an independent public authority having status of a body corporate, and financially and administratively independent from the Government."

Just recently Fitch downgraded DEWA to BBB- based on an assessment that Government support cannot be counted on.

If you still see an implicit guarantee, AA suggests a visit to your opthalmologist is in order.

The question is what rate DEWA will have to pay on the new Sukuk.

As of today, Dubai Sovereign US$ Sukuks (DEWA is not Sovereign) are trading very roughly at a spread of 550 to 570 basis points with AED denominated issues somewhere around  80 to 100 basis points less.  Jebel Ali Free Zone (which is B+ note DEWA is BBB-) is trading at more than twice the Dubai Sovereign spread.  That suggests a range.  One would expect if priced today that logically DEWA a non Sovereign Dubai obligation would carry a higher rate than the Sovereign.  That implies something over  600 basis points. 

Some caveats:

1. As mentioned earlier, most bond markets (except US Governments) are thin.  Prices accordingly have less "precision" than in more liquid markets.  The GCC bond market is relatively anorexic compared to other thin markets.  The true test of a quote is when you try to hit it as screens do not trade institutions do. 
   
2. Pricing in 1Q 2010 will reflect (a) what has happened and how it has happened on the Dubai World restructuring of Nakheel and (b) macro economic factors/investor preference.
3. It's also important to remember that financial markets are not always logical. 
   

I wouldn't expect that market sentiment is going to improve that dramatically.  And probably not much progress is going to be made on the Nakheel restructuring with the various holidays coming.

Bankers and investors don't like uncertainty so I'd anticipate higher rather than lower prices.   DEWA has an ambitious capital spending program and constraining it will be more difficult than not building another 1 km tall sky scraper.  So it needs the money.  And Dubai does not have a lot of financing alternatives in the market.   The market knows this. 

Abaar Loan

AlQabas quotes an unnamed analyst at National Bank of Abu Dhabi that the loan may be for:

1. Temporary refinancing of a maturing loan while Aabar sorts out financing options.
2. Purchase of additional shares in Daimler.
   

Dubai US$5 Billion Debt Sales - Less Than Meets the Eye and An Explanation for the Restructuring at Dubai World

Two stories came out today with contradictory themes:

1. The first was that Dubai had successfully sold US$5 billion in bonds from the Second Tranche of its US$20 billion program.  
2. The second was that Dubai announced the appointment of a Chief Restructuring Officer at Dubai World and more importantly asked creditors for a payment standstill until May 2010.

The explanation for this dissonance is in an article in Thursday's The National (Abu Dhabi).

It seems that the US$5 billion sale was actually US$2 billion in cash now with the promise to buy the remaining US$3 billion over the next year.  

US$ 2 billion is not enough to address the Emirate's  near term cash flow needsd - payments to suppliers and debt maturities, including  an AED12.85 billion Sukuk (US$3.5 billion bond) issued by Nakheel. 

So the Emirate was left with no option but to ask for a six-month debt repayment standstill.  

Looking behind this, what are the conclusions we should draw.

1. As I posted earlier and as The National confirms, this is an Abu Dhabi Inc. deal.  It is not a private sector non governmental deal.  
2. Despite attempts by Dubai to spin the bond sale as proof of access to the market, the Emirate  has only limited access.  If it did, it would have raised more money and not needed to tap Abu Dhabi again.  Today's announcement is likely to further restrict access.  
   
3. Abu Dhabi is still supporting Dubai but extending the time over which the cash is infused.  This presumably is to put pressure on Shaikh Mohammad to make some real changes. Until just recently Dubai was talking of raising the full US$10 billion of Tranche 2.
4. It is also a signal to the market - to other creditors - that Abu Dhabi is not necessarily the lender of last resort for Dubai.
   
5. The sudden dismissal earlier this week of Dr. Sulayman at DIFC and the replacements at the IFD are probably related.  And perhaps preparation for today's bad news.  Change that hopefully creditors will believe in.  New sober faces.  The guys who will use both sides of the Xerox paper.
   
6. Expect to see more evidence of a fundamental change in Dubai's strategy.  The new CRO at Dubai World is just the first step in this direction.
7. The standstill request is going to send shockwaves through the financial markets. Look for a reaction at the Dubai Exchange and some spillover elsewhere in the GCC. 
8. The credit markets - already struggling with Saad, AlGosaibi, The Investment Dar, Awal, The International Banking Corporation, Global Investment House - are likely to react negatively.   Not just foreign lenders and investors but also regional ones.  Spreads on Dubai Credit Default Swaps are going to increase.  Banks and bond investors are going to become more cautious across the region.   
   
9. As a result, Dubai's market access is going to be reduced.  It is going to have to focus primarily on restructuring its existing debt.  New financing, if any, is likely to be relatively modest compared to the past.  
10. This will have a direct impact on the local economy which was largely fueled by  an intense multiplier effect of a series of transactions of apparent (and note that is a deliberate word) increases in value - but whose primary basis was debt.  
    
11. Even Aabar may be impacted.  It could wind up paying more for the refinancing for its recently announced six month US$1.625 billion club loan.
    

The announcement seems to have been timed  to the Eid holiday - no doubt in the hopes that some of the shock will dissipate before markets begin trading again next Monday.

There will be more to come.  And the prognosis is not for good news.

Dubai Raises US$5 Billion from "Private Sector" - Or Did It?

You've probably seen the news that Dubai raised US$5 billion in the second tranche of its US$20 billion bond program.

Much is being made of the fact that it secured funding this time from the "private sector" and didn't have to rely on help from the Emirate of Abu Dhabi.

Last time I looked the majority owner of both National Bank of Abu Dhabi and AlHilal Bank was the ADIC (Abu Dhabi Investment Council).

Isn't this pretty much what happened with Tranche #1?

Abu Dhabi didn't actually directly  purchase the bonds from Dubai.  The Central Bank of the UAE did (the first US$10 billion.)  Of course, with money given it by Abu Dhabi.

To characterize Tranche 2 as a non Abu Dhabi Government private sector deal is a bit of a stretch.  Well, maybe more than a bit.

And when you think about it, if you're Abu Dhabi, isn't it better to have the CBUAE or NBAD/AlHillal fronting your money?  It's a lot easier for a Sheikh Mohammed to stiff a brother ruler than it is the central bank or two financial institutions.

Aabar Raises US$1.6 Billion Six Month Club Loan

Aabar disclosed to the Abu Dhabi Exchange that it had raised a US$1.625 billion six-month club loan from a group of international and local lenders.

Looks like a bridge to a capital markets issue or perhaps a syndicated loan.

UK Firms Providing Involuntary Supplier Credit in UAE (Dubai)

GBP 200 million.

UK Government asked to help earlier.

Dues down by 50% from May.

Dubai - Supplier Financing Being Pursued for Transport Projects?

Another rumor - Dubai is looking for supplier finance for transport projects.

Usually one looks for supplier finance when the usual credit sources (banks and bonds) are reluctant.

If true, not a good sign for Dubai Inc. 

But with so much debt to refinance, how do you get financing for new projects?  You lean on every source you can.

On the topic of involuntary supplier credit, you'll recall there was a very public (and very uncharacteristic) complaint by Japanese contractors about late payments on various projects in Dubai including the Metro.  Earlier SAM post.

Shakeup in Dubai Inc

Dr. Omar Sulayman is out at DIFC.

He is therefore out at Investment Corporation of Dubai ("ICD").

As are the following also out at ICD:

1. Mohammed Gergawi at Dubai Holding  (He just gave a speech this week at World Economic Forum Global Agenda Meeting in Dubai, which was optimistic to put it mildly).
   
2. Sultan Sulayem at Dubai World
3. Mohammed Al Abbar at Emaar

FT analysis here.  Khaleej Times here.

I think there are three motives:

1. Despite the "humming" you're told you can or should hear from Dubai, the financial situation is not good.
2. "New faces" to put in front of the bankers.   Sober new faces not associated with the old policy.  Guys who are going to use both sides of the Xerox paper.
   
3. Cover for Dubai Inc.  Those responsible have been dealt with. 

Qatar Sovereign Bond Successful - US$7 billion + Long Tenor

Qatar's sovereign bond offering was a roaring success:

1. US$3.5 billion Maturity 2015 Margin 185bps
2. US$2.5 billion Maturity 2020 Margin 195bps
3. US$1.0 billion Maturity 2040 Margin 215bps

Note the 30 year maturity on the last tranche.

There have been some press reports which have noted that this bond is now the largest US$ bond issuance by an emerging market investor as it surpassed the US$6.1 billion in bonds issued by the PRC's Ministry of Railways back in November 2007.

But, let's look at the details of that issue to see that more than size matters with Qatar.

The PRC issue consisted of and were priced as follows:

1. US$1.2 billion 7 year bonds at 5.38% (fixed rate)
2. US$3.5 billion 10 year bonds at 5.6% (fixed rate)
3. US$1.4 billion 15 year bonds at 5.75% (also fixed)

Much longer tenors.

Yemen LNG US$2.8 Billion Financing in Yemen - How'd They Ever Pull That Off?

When you read my earlier post about the first LNG shipment from Yemen, did you wonder how the project was able to raise its financing?

Yemen LNG posed some difficult financing challenges:

1. Size:  US$ 5 billion dollars with a high percentage of foreign costs which can't be financed in local currency.   So quite sizable foreign currency loans are required.  Raising a loan 1% this amount would be a challenge.
   
2. Tenor:  A project like this requires long tenors.  To compound matters bankers aren't keen to even make short term loans in the country. 
   
3. Yemen:  Lots of problems - economic, political, social.  A weak country = a weak sovereign credit.  Not exactly a prime target for bankers.
   

Standard and Poor's, Moody's and Fitch do not bother to issue a credit rating for Yemen.  There really isn't any demand.   Other ratings agencies do.  But the ratings are not good.   Capital Intelligence assigns Yemen a "B" and the Economist Intelligence Unit "CCC".   Unlike the academic world, a  credit rating of "B" is not a passing grade.  Except perhaps in the sense that bankers usually  "pass" on the opportunities to extend credit to borrowers with that grade.

Putting aside the project finance structuring issues (upon which I'm sure you can imagine I could wax, if not eloquently, at least profusely), there are two answers to how the deal got done - both of which gladden the heart of flinty-eyed bankers:

1. Equity - To provide a cushion to lenders: project cashflow pays lenders first before it pays shareholders.   The more equity the less risky the project.   If you were a lender, which of two identical US$1 billion projects (except for equity) would you prefer to lend  to?  The one with  $500 million in equity?  Or the one with  $100 million?  But there's more to equity.  It's not just the quantum of equity provided up front but also the credit quality of the shareholders that comforts lenders.  Having parties with both a significant monetary interest in the project (something to protect) and the capacity ("deep pockets") to lend a helping hand if the project hits a rough spot is very good.   Securing this kind of quality shareholder is a common goal in project finance everywhere.  In Yemen it was, no doubt, even more important.  Both  to the commercial lenders and the export credit agencies ("ECAs") involved in the transaction.
   
2. Guarantees - There's nothing that makes a banker's life easier than someone else taking the difficult bits of risk.  In this case 100%.   Especially if the guarantors are major sovereigns  acting through their ECAs or a major MNC like Total. 

Yemen LNG reports that the project has 40% equity (US$2 billion) and 60% debt (roughly US$3 billion).

Let's look at the equity first.

Shareholders are:

1. Total France - 39.6% (International oil and gas major, active in the ME since 1924 and Yemen since 1987.  Other LNG projects in the GCC - Qatargas, Dolphin).
2. Hunt Oil USA - 17.2% (Founded by HL Hunt.  Ray Hunt supposedly is on a first name basis with the President of Yemen.  Active in the country since 1981.  Hunt Oil, that is, not Ali).
3. Korea "Inc" - 21.5%   (SK at 9.6%, Korea Gas at 6.0% and Hyundai at 5.9%)
4. Yemen Gas Company - 16.7%. (Yemeni Government company).
   
5. GASSP (Yemen) - 5% - Yemen's General Authority for Social Security and Pensions.

More details on these entities here.

The majority foreign ownership involving oil companies like Total and Hunt would give lenders  and ECAs comfort.  Why?  They have demonstrated technical competence with similar projects from discovery through successful commercial operation as well as marketing of the offtake -the project product, LNG.  If something goes wrong (and bankers should always worry about that), these shareholders should be able to fix the problem if indeed the problem can be fixed.

Kogas is a major buyer of LNG.  Having it as a shareholder, gives it incentive to continue to buy from the project.  If suddenly it needs less LNG, instead of canceling its contract with Yemen LNG, it could cancel its contract with another seller (unless of course it's a shareholder there as well).   In the case of a problem with another offtaker, Kogas might step up to buy more to protect its equity in this project.  (As an aside, the offtakers are:  Kogas at 31%. of planned project production.  Total 31%.  And Suez 38%.  Twenty year contracts with highly credit worthy parties -- another comfort to those holding project risk).

The other two Korean parties were involved in the construction.  By buying equity they have reinvested part of their profit into the company.  If the project fails, they lose all or part of their profit margin - an incentive for them to help to make the project work if it has problems.

The Yemen government agencies mean the government has a direct stake in the project's success.  It's not just in their country.  They're owners.

Turning to the project debt, US$2.8 billion was raised.

1. US$1.3 billion in senior limited recourse project finance facilities extended by a group of international banks but bearing comprehensive risk cover (both political and commercial). This  cover is being provided by the official export promotion programs of France (Coface for US$648 million), Japan (Nexi for US$80 million), Korea (KEXIM for US$160 million).  The lead banks involved are Bank of Tokyo Mitsubishi, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, Societe Generale, Lloyds TSB, and SMBC (Japan).  They make  and administer loans to the project.  In the event of project non payment, they can call upon the ECAs to repay their loans.
   
2. US$240 million direct loan to the project from KEXIM (the Korean Government ECA).
3. US$120 million direct loan to Yemen LNG from JBIC (the Japanese ECA).
4. US$1.1 billion commercial facility guaranteed by Total France. Same banks as in #1 above.  I'll comment a bit later about an interesting feature of this guarantee.
   

It's clear that Total did the heavy lifting necessary to make the project a success:  contributing the majority of the equity and guaranteeing the US$1.1 billion loan.  

Most reviews of this transaction - at least the ones I have seen - don't  discuss the fact that Total has counterguarantees in its favor for roughly 32% of its US$1.1 billion guarantee from other equity partners in the deal.  One alternative would be for all the parties to give guarantees to the lenders:  Total for 68% of the amount and the other shareholders for 32%.

But that would pose some problems.  First, some of the shareholders are not acceptable to lenders for any amount or tenor.  That would mean a loan for less than US$1.1 billion (and remember the project needs US$1.1 billion not less).  Second, Total's credit rating is easily higher than the other shareholders.  It can get the best terms - the best interest rate and the longest tenor.

By giving its guarantee for 100% of the loan, Total substitutes its credit for its partners.   In effect Total is intermediating credit risk .  It accepts the relatively weaker credit risk of its partners (the 32% counterguarantee) so the lenders don't have to. If Total's guarantee is called by the lenders, it is obligated to pay whether or not the other shareholders honor their counterguarantee to it.

And one final comment.  The Yemen LNG financing won several awards in 2008 for "Deal of the Year".  Since bankers like to give themselves awards (and who doesn't),  there are a large variety of contests and awards, though as of yet I don't believe Donald Trump is hosting any of them.  Besides that bankers also devote their creative talents to designing titles for participants in a deal.  Having a fancy title and a good position on the deal "tombstone" (on the left at the top of the list of the banks is preferred in case you're wondering) is very important.  Some of the most intense discussions in a deal are not with the borrower or issuer but among the banks.  On one deal we contented one bank with the title "Technical Modeling Bank".

Trackback to previous related post.

Yemen LNG Makes First Shipment

A bit of good news for this beleaguered country - which is desperately in need of hard currency earnings, not to mention water, peace, progress .....

Most estimates are that over its 20 year or so life the Yemen LNG project will generate US$20 billion for Yemen.  The Yemeni Government's own "conservative projections" estimate US$30 to US$50 billion.

Much needed because oil exports, Yemen's current major source of FX revenues (roughly 90%),  are rapidly running out.  Estimates are for 10 years more production, though the Yemeni Government disputes these figures.

Anyways a few random data points to illustrate the importance of Yemen LNG to the country:

1. In 2003 Yemen exported 450,000 barrels of oil per day.  In January 2009 the total was down to 280,000 bpd.
2. During the first six months of 2009, FX earnings from oil exports were down 75% from the same period in 2008.  Most of that is due to the decline in oil prices, but a worrying 25% drop in volumes exported was also a major cause.
   

So Yemen LNG's first shipment is good news for Yemen.  A substitute for dwindling oil exports.

For those interested in more on Yemen LNG, here's a link to their website.

The project has been "kicking around" since the 1990's.  As one might expect, putting a deal of this magnitude together in Yemen is not an easy task.  The shareholders' group has been a bit of a revolving door - ExxonMobil withdrew after the 1994 civil war.  Enron sniffed around a bit but declined. At one point Hunt Oil (an old Yemeni hand) was rumored to be contemplating withdrawing from the project.  Competition from Qatargas and Dolphin in which Total (the major shareholder in Yemen LNG) has interests also were obstacles.

For those interested in a bit more information on Yemen, two suggestions:

1. Christopher Boucek's "Yemen Avoiding a Downward Spiral" at Carnegie.
2. The IMF's Public Information Notice ("PIN") on  Article IV Consultations with Yemen released this March.
   

Boucek's piece is an overall analysis of all factors - political, economic, and social.   It is also written to promote a particular policy response so factor into your evaluation how that goal may affect his diagnosis and conclusions.

The IMF PIN is focused on economics only.

Some background on the Article IV process and PINs.

Each country that has joined the IMF  (there are 186 or so) undertakes certain obligations with respect to the conduct of its affairs.  A key part of those are reflected in Article IV.   Each year the IMF "consults" with countries about their obligations focusing on Article IV. Member countries have the right to decide how much detail is released to the public about the results of those consultations.

Two other things are relevant to Article IV consultations.

1. Diplomatic Speak:  The position of the IMF is couched in diplomatic language.  Criticisms come in the form of "encouragements" or "strong encouragements".  Issues are described in similar gentle language.  Instead of stating that a member country's economic statistics are deficient, the PIN will speak about improving the timeliness and accuracy of statistics. 
2. Mathhab:  The IMF holds more or less to a certain economic philosophy.  It's important to understand this when reading both their diagnosis and prescriptions. 
   

A second post will follow to hopefully shed some light on the intriguing story of how US$2.8 billion in long term financing was raised for a project finance in a country in Yemen's situation.