Covid-19 and the subsequent oil price collapse that followed have been destabilising for the entire MENAT (Middle East, North Africa, Turkey) region. Although local markets are facing sharp economic contractions this year, the role of escrows is likely to become increasingly important. HSBC Issuer Services identifies some of the key trends underway in MENAT and looks at how the escrow model is adapting to meet evolving client demands.
1. Riding the deal making wave
Although deal volumes have declined in MENAT, activity in the run-up to the Covid-19 lockdown period was remarkably buoyant, according to Nabil Lahham, Head of Advisory and Corporate Finance Coverage, MENAT, at HSBC. High profile deals included one of the biggest IPOs (initial public offerings) in recorded history – which took place in Saudi Arabia last year – a transaction which HSBC Issuer Services was heavily involved in.
“Despite the dislocation, we successfully closed a number of high profile deals in the first quarter,” he says.
HSBC advised Abu Dhabi-based Tabreed on its acquisition of an 80 per cent stake in the Dubai district cooling business of Emaar Properties for USD675 million.1 In addition to the M&A services, HSBC provided a USD692 million credit facility to Tabreed2 and HSBC Issuer Services also acted as escrow agent and facility agent on the financing. This one stop solution – whereby advisory, financing, and issuer services are all provided under one umbrella – helps delivering a more seamless client experience. “In terms of value-add, this joined up service allows HSBC to provide a more streamlined solution for clients, and therefore quicker execution. This unique approach also gives clients a higher level of confidentiality and peace of mind of working with one partner end-to-end,” comments Lahham.
Despite the drop-off in corporate transactions, experts are confident that deal-making will resume – and with it an increased demand for escrow products. “I believe a lot of important transactions will continue to take place, while we will also simultaneously see consolidation in certain sectors, especially financial services and retail. In addition to an increase in non-public M&A activity, I anticipate a number of listed companies will merge or undergo rights-issues. The next few years are likely to be active,” highlights Lahham.
I believe a lot of important transactions will continue to take place, while we will also simultaneously see consolidation in certain sectors, especially financial services and retail.
2. Supporting project finance and ESG initiatives
The shortfall in projected oil revenues is expected to have a detrimental impact on some of the more ambitious infrastructure programmes in MENAT. As part of Saudi Arabia’s Vision 2030 scheme, the Kingdom is developing a new USD500 billion smart city – known as Neom – in the north western province of Tabuk. Proponents say the city, which will be spread over 26,000sq km, could lead the way in renewable energy production and disruptive technologies.
“Saudi Arabia is determined to push ahead with its Vision 2030 agenda, although Covid-19 will likely have some consequences. I doubt Vision 2030’s main priorities will be put on hold but I suspect there will be some adjusted sequencing and altered timelines on some projects. Egypt is also showing positive signs in the Project Finance space where we are witnessing opportunities, some of which are linked to its New Urban Capital plans and Solar Energy initiatives. In general, across the MENAT region, I imagine some of the more critical infrastructure initiatives will be accelerated while other, less key projects, may be reprioritised,” explains Pankaj Kaul, head of Issuer Services, MENAT at HSBC.
HSBC has an extensive track record of supporting ESG (environment, social, governance) programmes across MENAT. For instance, HSBC was the ECA (export credit agency) co-ordinating and documentation bank for the Kuwait National Petroleum Company when the oil giant was upgrading and modernising its refineries3. At the same time, HSBC Issuer Services has provided a lot of the operational bandwidth behind some of these ESG-linked transactions.
In general, across the MENAT region, I imagine some of the more critical infrastructure initiatives will be accelerated while other, less key projects, may be reprioritised.
3. Facilitating inward investment into the Middle East
Up until Covid-19 struck, HSBC Issuer Services had been providing a number of escrow solutions to support cross-border investments into the MENAT markets, with the China-Middle East investment corridor being especially active. This China-Middle East investment corridor is part of the wider Belt and Road Initiative (BRI), a large-scale, long-term infrastructure programme designed to promote trade, financial and cultural connections between China and its international partners, including those in MENAT. “Although inbound investment into MENAT has paused slightly, we are now beginning to resume conversations with investors,” comments Kaul.
Some global investors have sensed a return opportunity and are looking at opportunities to invest in certain MENAT markets to find ways to generate better returns. There is also a growing interest from large sovereign wealth funds to invest in the growing MENAT economies to support the region’s overall economic growth and development whilst generating better yields on their investments. “We are seeing a bit more activity on the escrow side, with transactions involving large sovereign wealth funds in markets such as Egypt. Elsewhere, regulatory changes in Egypt, Bahrain and Oman now allow for the use of escrows in real estate transactions. It is difficult to assess how the real estate sector in these countries will emerge from Covid-19, but I anticipate escrows will become more prevalent when the market recovers,” says Kaul.
Escrows are being used more widely outside of the traditional M&A market. For instance, we have provided escrows to support high-profile sporting events and patents.
4. Escrows as innovation enablers
Escrows have typically been deployed in M&A or project finance transactions, but they are versatile and can be utilised for many different purposes. In fact, this is already happening in MENAT. “Escrows are being used more widely outside of the traditional M&A market. For instance, HSBC Issuer Services has provided escrows to support high-profile sporting events. We have also developed escrows for patents. In this case, the escrow was leveraged in an acquisition of patented assets before the ownership was fully transferred,” comments Paul Farrell, Senior Business Development Manager, MENAT at HSBC Issuer Services.
Escrows can play a vital role in insulating market participants during transactions, especially those taking place during volatile periods. In addition to facilitating timely execution, escrows are an invaluable risk management tool, and can protect buyers and sellers from timing and counterparty risk, enabling for funds to be protected during deals. Given these unprecedented circumstances, it is critical that clients engage with service providers who have a robust balance sheet capital base and a best in class credit rating.
The needs and requirements of clients have been transformed by the pandemic, acknowledges Kaul. The lockdown has forced providers and their customers to adapt their operating models quickly in a way that ensures service delivery is not compromised. HSBC is playing a critical role in supporting the Covid-19 effort, “We have been providing escrows to support companies involved in the fight against Covid-19. Our solution provides a quick and efficient mechanism to facilitate cross border medical equipment procurement transactions.” says Kaul.
Globally, HSBC has been engaging closely with clients, supporting them with their various liquidity requirements and helping them access programmes as and when needed.
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1 Reuters (April 6, 2020) Tabreed buys 80 per cent of Emaar Properties’ Dubai cooling business for USD675 million
2 Arabian Business (april 7, 2020) Read the article
3 Source: https://www.gtreview.com/news/asia/knpc-bags-us6-25bn-of-eca-backed-loans/
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