COMPANY FOCUS >> Bahrains's BAPCO

March 2005

Bapco signs $One billion finance deal with group of banks

Bahrain's Bapco signed a $1.01 billion loan facility with a consortium of local and international banks, the biggest in its history, to finance its Strategic Investment Programme.

The programme includes the modernisation of the company's refinery. “This is a historic achievement that will further advance the development process of Bahrain,” said Sheikh Issa bin Ali Al Khalifa, Minister of Oil and Chairman of Bapco.

Bapco is fully owned by the government. Credit facilities from the banks will enable Bapco to implement several commercial and environmental projects by 2008, including the $685 million low sulphur diesel production project.

This marks the culmination of a highly successful capital-raising exercise by Bapco with strong support from the Government, which was warmly received by the local and international financial market.

Mustafa Al Sayed, President of Bapco, said that following ‘a very strong response from the financial market’ to the proposed financing structure, the financing was raised from $650 million to enable Bapco to successfully raise over $1 billion, with a door-to-door maturity of 11 years and 6 months.

It will incorporate a $370 million commercial facility, a $330 million Islamic lease facility, and a $311 million JBIC/NEXI facility.

The loan will refinance a $150 million facility put in place by BNP Paribas and HSBC to front interim payments.

“The financing is based on a commodity structured scheme which relies on both Bapco's corporate strength and strong sovereign support,” he said.

Al Sayed said the Strategic Investment Programme covers implementation of several profit and environmental projects by 2008 to enable the refinery to meet most stringent quality and environmental projects.

He also said that the low-sulphur diesel production (LSDP) project is the largest component of the programme at a total cost of $685 million.
BNP Paribas and Arab Banking Corp were appointed Commercial Book runners, and HSBC and Kuwait Finance House were appointed Islamic Book runners.

BNP Paribas was also appointed commercial documentation agent, global agent, onshore security agent, offshore security agent, account bank and modelling bank.

HSBC was appointed Islamic documentation agent and Apicorp was appointed technical bank.

Kuwait Finance House was appointed Islamic lease facility agent and GIB Commercial facility agent.

Other banks that were present to sign the agreement were Mizo Ho, the Japanese International Co-operation Bank, Arab Banking Corporation, Apicorp, Gulf International Bank, JGC of Japan, National Bank of Bahrain and Dubai Islamic Bank.

Present at the signing of the agreement were Finance Minister H.E. Sheikh Ahmed bin Mohammed Al Khalifa, Commerce and Industry Minister Dr Hassan Fakhro, Bapco Vice-Chairman H.E. Sheikh Salman bin Khalifa Al Khalifa, Japanese Ambassador Takao Natsume, bank representatives, ministry officials and company executives

The economy

Endowed with much smaller oil resources than its neighbors, the Kingdom of Bahrain established a policy of openness and diversification early on and has become one of the most advanced economies in the region with liberal exchange rate, trade, and investment regimes.
Macroeconomic performance has fared well relative to the other countries of the Gulf Cooperation Council (GCC). Diversification efforts have resulted in the development of non-oil activity in manufacturing (in particular, aluminum) and various non-financial services, including tourism. In addition, efforts to establish Bahrain as a regional banking and financial services hub have had remarkable success.

Given its relatively small hydrocarbon resources, Bahrain has intensified programmes to expand its sources of income, with special emphasis on the financial and industrial sector.

As a result, Bahrain is now classified as one of the main financial centres in the Middle East while its Alba smelter is one of the biggest aluminum plants in the world.

In 2004, Alba produced over 530,000 tonnes of high grade aluminum, its highest output levels since it was established nearly 34 years ago. The government-controlled company also has plans to invest nearly US$ 1.7 billion to finance the Line 5 Expansion Project which will increase annual production capacity to over 830,000 metric tonnes to make Alba the largest aluminum smelter in the world outside Eastern Europe.

Bahrain is also set to benefit largely from the creation of a GCC customs union as it is expected to increase its tax revenue and trigger a capital influx by investors from the other GCC member states and foreign businessmen who will be enticed by a projected growth in the region following the establishment of the customs union and the subsequent creation of a monetary union.

Recent macroeconomic performance in the Kingdom has been strong, with real GDP growth exceeding 5.5 per cent in 2003, up from 5 per cent in 2002, according to estimates by the International Monetary Fund (IMF).

Non-oil growth performance rose from about 6 per cent in 2002 to 6.5 per cent in 2003, underpinned by strong growth in manufacturing (mainly aluminum) and financial services. Prices increased only slightly (by about 1 per cent). Broad money rose by 6.4 per cent in 2003 on account of a 9 per cent increase in credit to the private sector, while velocity remained stable.

The IMF gave no figures for 2004 but according to the Abu Dhabi-based Arab Monetary Fund (AMF), Bahrain’s gross domestic product swelled by around 5.6 per cent in real terms while inflation was kept as low as 2.1 per cent.

AMF figures showed Bahrain’s total exports peaked at nearly $8.2 billion while imports stood at $5.9 billion, creating a trade surplus of about $2.3 billion.

The consolidated fiscal position improved and registered an overall deficit of 1.8 per cent of GDP in 2003, largely on account of higher oil prices. While the share of total expenditure relative to GDP has varied significantly in recent years, capital spending has increased in 2002-03.
In its annual review of Bahrain’s economic and fiscal position last year, the IMF noted that there has been recent progress in the area of structural reforms.

“The government has completed privatisation of the country's public bus network, liberalised the telecommunication industry, and set up the regulatory authority in 2003. Legislation to enhance the transparency of privatisation procedures was also passed in 2003.

Progress in privatisation of public utilities has been slow, however, due to concerns of increasing unemployment, although plans are under way to involve the private sector in the operation of the newly built Hidd power generating project,” it said.

“The financial sector remains one of the main engines of growth for Bahrain's economy and one of the most vibrant in the region. To ensure effective supervision and mitigate risks common across the components of the financial sector, the Bahrain Monetary Agency (BMA) has consolidated the supervision and regulation of the financial sector (including banks, insurance, and capital markets) under one umbrella. Bahrain is at the forefront in developing Islamic financial services.”

The report said, IMF Executive Directors commended the Bahraini authorities for their prudent management of the economy, which has resulted in consistently high GDP growth, low inflation, a manageable debt situation, and positive social and development indicators.

They endorsed the authorities' strategy to improve the country's competitiveness and growth prospects through continued openness, diversification away from oil and gas production, and institution building. The most notable success has been in the financial sector where, through appropriate regulations and innovations in conventional and Islamic finance, Bahrain has become a regional hub.

“Directors considered that the main challenge over the medium term will be to build on earlier successes by sustaining non-oil growth and creating employment opportunities for the growing Bahraini labour force. This will require further progress in key structural areas, in particular, reducing the role and size of the public sector while encouraging private sector development and investment, eliminating rigidities, particularly in the labour market, as well as continued adherence to principles of good governance in public sector institutions and the corporate sector,” it said.

“Directors also commended the authorities for their commitment to maintaining a prudent fiscal policy. They noted that in the 2004 budget, increases in capital expenditures for infrastructure modernisation and utilities will be more than offset by increased revenues from oil receipts, and that a small fiscal surplus is to be achieved.”

For the medium term, Directors considered that plans to scale back capital expenditure to contain any emerging macroeconomic imbalances should be complemented by fiscal reforms aimed at further strengthening fiscal institutions and enhancing the non-oil revenue base, thereby reinforcing growth and diversification efforts.

“Directors welcomed the government’s intention to establish an oil stabilization fund by the end of the year, in order to preserve hydrocarbon wealth for future generations. In this context, they expressed the view that to safeguard intergenerational equity, expanding the economy's productive base and developing human resources will be as important as accumulating financial assets. “

The IMF considered appropriate the authorities' focus on liberalization and structural reforms aimed at promoting private sector-led growth and creating job opportunities. They welcomed the privatization of the public transport company, and the intention to privatize the postal and port management services.

It encouraged the authorities to press ahead with their structural reform agenda to promote wider private sector participation, including through further privatization in the infrastructure and utilities sectors.
“Eliminating remaining barriers to foreign ownership of commercial assets will provide additional impetus for foreign investment in the non-oil sector,” it added.

It also welcomed the emphasis placed in the authorities’ programme to reduce unemployment among Bahraini nationals on vocational training and initiatives to unify benefits in the public and private sectors, to make private sector employment more attractive.

Financial sector
Apart from industry, Bahrain has also focused on the financial and banking sector within ongoing programmes to diversify its economy and increase income.

The long-standing efforts have resulted in turning the Kingdom into one of the biggest financial centres in the Middle East and a key Asian base for offshore banks.

Given the steady growth in its economy in most years and expanding business opportunities in the region, Bahrain’s financial and banking sector has performed well and recorded steady expansion over the past two decades.

Figures by Bahrain’s Monetary Agency (Central Bank) showed the consolidated balance sheet of the banking system in the Kingdom, full commercial banks (FCBs), offshore banking units (OBUs), and investment banks (IBs) increased by US$3.5 billion (3.2%) to reach US$111.4 billion at the end of September last year, compared with US$107.9 billion at the end of June. The OBUs accounted for 82 per cent of the consolidated balance sheet, while FCBs and IBs accounted for 12.1 per cent and 5.1 per cent respectively.

Its quarterly bulletin also showed total domestic assets amounted to US$16.3 billion at the end of September, compared with US$16.1 billion at the end of June, an increase of US$0.2 billion. Foreign assets increased by US$3.3 billion to reach US$95.1 billion compared with US$91.8 billion in the same period. The net foreign assets surged by nearly 15.8 per cent to around US$0.6 . Total domestic liabilities grew to US$20.7 billion at the end of September from US$19.9 billion at the end of 2004 while Foreign liabilities increased by US$2.7 billion to US$90.7 billion.

The report showed the consolidated balance sheet of full commercial banks increased by BD48.5 million to reach BD5,064.6 million at the end of September compared with BD5,016.1 million at the end of June..
Total domestic assets rose by BD56.1 million to BD3637.0 million while claims on non-banks increased by BD107.8 million, on banks BD58.5 million and on the Government (loans and securities) by BD16.3 million.
Foreign assets declined by BD7.6 million to BD1,427.6 million at the end of September 2004. Claims on foreign banks decreased by BD78.0million while claims on non-banks rose by BD70.4 million. Total outstanding loans and advances extended to residents by commercial banks swelled to BD2,107.4 million from BD2,003.0 million.

Domestic deposits, which reflect confidence in the banking sector, increased from BD3,254.9 million at the end of June to BD3,282.4 million at the end of September. This was due to an increase in private sector deposits by BD27.0 million and Government deposits by BD 0.5 million.
According to the bulletin, the consolidated balance sheet of the OBUs soared by US$3.2 billion during the quarter, to reach US$92.3 billion at the end of September, compared with US$89.1 billion at the end of June.

Domestic assets of the OBUs rose slightly to around US$5.5 billion from US$5.4 billion in the same period while foreign assets grew by US$3.1 billion to US$86.8 billion