Wednesday, Jan 11, 2012

-- Most activity seen in mid-market deals

-- Investment bank net revenues fell in 2011

-- Pressures grow on companies to restructure

By Nicolas Parasie

OF ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--Investment banks in the Middle East are likely to see more restructuring work in 2012, as companies and government entities continue to struggle with debts they amassed before the financial crisis, while merger and acquisition (M&A) activity will be focused more on the mid-market deals, according to a senior banker at HSBC Holdings PLC in the Middle East.

"I see more restructurings to come, because there weren't enough in the first place. At a corporate level, at a government level, at the quasi-government level, I still think there is a lot more restructuring to be done," Omar Mehanna, managing director and head of advisory for HSBC in the Middle East and North Africa, told Zawya Dow Jones in a recent interview. In the Gulf region alone, some $80 billion of debt is falling due this year, according to data provider Dealogic.

Mehanna said he sees most debt restructuring and M&A activity taking place in mid-market deals, with values between $100 million and $500 million. As a result, investment banks active in the region may see average deal valuations declining further this year, even if the flow of individual transactions should remain active, Mehanna said.

The ongoing sovereign debt problems in Europe coupled with a global economic slowdown have dampened dealmaking levels worldwide. The Middle East hasn't been spared, with total investment banking net revenues falling to $523 million in 2011, the lowest level since 2005, when most international banks had still to build or expand their presence in financial centers such as Dubai and Doha.

"In terms of numbers of deals I do expect to see an increase, particularly in the midmarket segment of the industry," Mehanna said. The smaller companies find it harder to raise funds through the capital markets and therefore face greater pressure to sell assets, he noted. Cash-rich buyers are also circling those weaker players in search for bargains, another potential trigger for regional deals.

Meanwhile, pressures will grow on regional companies to push ahead with restructuring their debts.

"The banks and borrowers need to wake up to the reality that extending maturities and digging your head in the sand is not something that is sustainable," Mehanna said. "2012 is likely to be an important year in terms of how these issues will be resolved," he said. Indebted entities can opt to issue new debt to repay existing obligations, ask creditors to defer payments or decide to do a restructuring.

In the years running up to the global financial crisis, the Arab Gulf region's boom was largely funded by cheap debt which is currently in the process of falling due. The Gulf region has $243 billion worth of both loans and bonds maturing in the next four years, a third of which is due in 2012, according to Dealogic.

Several companies and government-related groups have already restructured or are in the process of doing so. The best-known example is Dubai World, a conglomerate that agreed with creditors last year to reschedule $25 billion in debt. Other regional companies that are restructuring include Al Jaber Group, Drydocks and Dubai Group.

HSBC has around 25 bankers focusing on M&A and advisory work in the Middle East. Dubai-based Gulf General Investment Co last year hired HSBC as an advisor to restructure its debt after posting a nearly AED1 billion ($272 million) loss in 2010. The U.K. bank is also working on the restructuring of Kuwait's Al Ahlia Group. The bank currently has several "live restructuring mandates that are expected to completed and announced soon," Mehanna said.

-By Nicolas Parasie, Dow Jones Newswires; +9714 446-1681; nicolas.parasie@dowjones.com

Copyright (c) 2011 Dow Jones & Co.

(END) Dow Jones Newswires

11-01-12 0850GMT