Deutsche, HSBC fight over Saudi loan

Posted on August 14, 2013

DUBAI -- Lenders including Deutsche Bank, HSBC and China Development Bank are resisting calls by Saudi Telecom to restructure a loan that could potentially leave them with losses of up to $600 million, banking and industry sources said.

THE TWO TOWERS of the Deutsche Bank headquarters in central Germany -- AFP
The tussle over the $1.2-billion loan highlights the risks banks face extending loans to state-owned firms in the Middle East, where billions of dollars of debt had to be renegotiated in the wake of the 2008 financial crisis. It also shows banks, facing tougher capital rules, are less willing to accept losses.

Saudi Telecom backed the Islamic loan for Axis Telekom, its Indonesian arm, in 2011. But Axis’ performance has deteriorated and the company is now in breach of some of the loan’s terms, four sources aware of the matter said.

Saudi Telecom, which owns 84% of Axis, has asked banks to restructure the debt to reflect its true value of between $600 million to $800 million. The lenders, led by Deutsche Bank, have refused, and are considering alternatives to recover their money, the sources added.

“On the one hand, you have a big exposure that you cannot let go and on the other side, you have to be careful of your business relationships in the kingdom,” one Dubai-based banker said.

The deadlock is complicating Saudi Telecom’s plan to sell Axis Telekom to its rival, PT XL Axiata. Saudi Telecom needs the consent of the creditor banks before it can sell the business.

Saudi Telecom declined to comment on the loan negotiations but in an e-mailed statement, it confirmed it was in talks to sell Axis as its financial performance has been poor.

A source with direct knowledge of the deal said the two companies are yet to agree on Axis’ valuation. Saudi Telecom is demanding $800 million to $1 billion, while Axiata wants to pay $500 million to $600 million.

HSBC and Deutsche each have around a $250-million exposure to the Axis loan, while China Development Bank has about $350 million, according to two of the sources familiar with discussions. HSBC and Deutsche Bank declined to comment. China Development Bank was not available for comment.

Problems with the loan started about three months ago, when Saudi Telecom’s new management asked banks to restructure it. The banks argue that a “letter of support” for the loan from Saudi Telecom obliges the firm to honor it in full, which it is now refusing to do, sources said.

The loan was structured under English law, which means the banks can pursue legal options outside Saudi Arabia if need be.

Even a 10% haircut may result in losses of about $25 million each for HSBC and Deutsche, erasing almost all the money earned in fees from the region in the first half.

Deutsche was the top fee earner among investment banks in the Middle East for the first semester, earning $27.4 million in fees, followed by HSBC with $24.4 million, according to Thomson Reuters.

Among other banks, Citigroup, Inc. is said by two of the sources to have an exposure of less than $100 million. A spokesman for Citigroup in Dubai was not available for comment.

The Axis loan included a $450-million sharia-compliant murabaha facility arranged by Deutsche Bank and HSBC and underwritten by the banks’ Saudi affiliate. A murabaha is a cost-plus-profit arrangement. -- Reuters