Whilst project bonds have for some time been a popular source of financing for projects in the US, they have historically been slow to gain momentum in other parts of the world, including the Middle East.
A number of explanations have been advanced for this – in the Middle East, the deep pool of bank market liquidity for Middle East projects, supplemented by funding from export credit agencies and development banks, has generally been sufficient to meet financing requirements.
However, more recently, project sponsors have become increasingly focused on the need to release bank lending capacity that may be locked up in operational projects, in order to fund the construction of new projects. At the same time, institutional investors (particularly US-based pension funds, asset managers and similar investment funds) have focused on emerging market project bonds as a long-term asset class that matches their long-term liabilities profile, and offers a better yield than can be achieved in the low interest rate environment prevalent in developed markets.
These factors have resulted in a renewed impetus for the project bond market in the Middle East, as highlighted by the recent Shuweihat 2 project bond issuance.
Read more about the development of project bonds in the Middle East here.