Market Spotlight: Restructuring in the Middle East

By Suzy Bibko, Content Marketing Manager, EMEA

How is M&A faring in the Middle East? Is distressed market activity on the rise, as it is in other regions? And how can deals get done quickly? Tolu Alamutu, Pietro Castronovo, John Komninakidis, and Dipanjan Ray examined these issues in a discussion led by Alexander Dooler, and agreed that there’s more to come in the region.

Picking up pace
"From our side, a lot of deals are happening already," says Castronovo. "And a lot of distressed deal flow is happening in the region, especially with international investors coming to the region and taking ownership of local companies. We have seen several distressed loan arrangements as part of a bigger restructuring, but also as part of a specific intervention from some of the local investment companies. We have also seen the rise of private debt, and some successful fundraising, which of course is going to facilitate the number of deals that are going to happen. There is also the NPL segment, which hasn’t yet picked up to the same level, but we believe this should be an investment priority for our financial institutions and investment companies. We have seen a lot of return on them, but it's something that still needs to pick up pace."

Komninakidis agrees: "We're going to see a lot more activity. Financial support schemes have allowed companies to put off what may be inevitable. But all of these support schemes will end. Based on market intelligence, we foresee many of these deals in the second half of 2021."

In fact, the latest figures for the Middle East, Africa, and Turkey confirm that activity there is already up. Deal value in the region increased 40% in Q1 2021, rising from €20.3bn in Q1 last year to €28.4bn. Year-on-year deal volume also rose by 40%, from 100 to 140 transactions. The improving conditions have led to big upticks in key sectors, most notably TMT, where total value for Q1 2021 was up 341% year-on-year at €12.9bn. This was followed by the energy, mining & utilities sector, with recovering oil prices supporting a rise in deal value to €4.1bn from €374m.

Regulating and restructuring
But what about restructuring deals in the region? "What we have seen in the last few months is that restructuring is definitely not a taboo anymore," says Castronovo. "I think everybody understands the value and why you should do it. Saudi was probably the first to put together a proper regulatory framework for restructuring, but there's still some work to be done. We have done a lot of work with local regulators to make sure that the restructuring case is done in a good way, in a way that does a good job. Differential stability of the industry and providing the best outcome at the end is necessary."

Alamutu agrees. "I think it's fair to say, yes, there will likely be rises in reported non-performing loans and other sorts of distressed assets, but I think there are a few things to bear in mind. The first is that, judging from the comments from management, I think some of those restructuring conversations with some of the larger borrowers may have already taken place as economies have started to gradually reopen. So, we're not necessarily facing a cliff edge, so to speak. And second, where we have seen very large restructurings in the Middle East that affect a significant part of a certain country's banking system, we would expect the regulators to get involved in some way, and that might mean by saying how much provisions a bank has to set aside, or by continuing to provide whatever liquidity that the banks need or capital to work through those larger restructurings."

Diligence and disclosure
But if these deals increase, the challenges around them likely could, too. So, what do dealmakers need to heed to get these deals done?

For Dipanjan, it boils down to two things. "To me the biggest issue is disclosure. Because every time you buy a tradeable asset, you have to know how much is there. And based on that, you have to decide pricing, how much you want to pay for it. And unless that disclosure is freely available to all investors, and is verifiable, this could pose a problem. But the second related issue is around how many NPLs could actually come to the market, because this depends on how much the banks have already booked for it. So, disclosure and the funding gap are two big issues."

"Some of these non-performing assets, non-performing companies will be owned by the same institutions that own the banks, and there might be issues around privacy and disclosure," agrees Alamutu. "This is something that some Middle East banks may have to address with their regulators, with the owners, on how much information they might want to disclose regarding certain of the borrowers. I think this is a blessing because if people are looking to get involved in distressed assets, you want as much information as possible. There has to be a well-functioning, non-performing loan market."

Technology takes center stage
Komninakidis says this is where technology can really take center stage. "Having the information to run the diligence process will play a key role in getting these deals done. So, before you start running the diligence process, disseminating the right information will give the right signal to the buyers. I truly believe that speed and insight are needed, along with the tools covering the whole M&A lifecycle. At Datasite, we try to help dealmakers as much as we can. If you want to finalize a restructuring deal in less than three months, you need to make sure you have all the tools, and we have them to help you do just that. Technology will play a key role in restructuring and should be at the heart of the strategy from the very beginning."