Last month Singapore government-backed investment group Temasek paid $2.3 billion for a 11.55% share in Standard Chartered. Initially the deal ended longstanding speculation about a takeover bid by Citigroup or JP Morgan. Then an internal Temasek memo leaked to the press kickstarted the rumour mill again – not because Temasek had said it would make a future bid for a majority stake but because the memo did not say it would not.

But takeover speculation aside, what Temasek got for its money is the biggest single shareholding in a banking group that saw earnings per share jump 23% to 153.7 cents (87.6p) in 2005 – an achievement given Standard Chartered issued 10% more shares at the beginning of 2005 – and pre-tax profits growth of 19%. An integral part of that growth has been Standard Chartered's corporate finance group and within that the fastest growing project finance group in Asia, the Middle East and Africa.

The irony of Standard Chartered is that it is as speculative as it is itself the focus of speculation. Three years ago, when other banks were slimming down or getting out of the project finance market, Standard Chartered hired Will Rathvon (global head of project and export finance) from Bank of America to build and head up its project finance business. A year later it bought up the London-based project business of ANZ – in effect loans and commitments of around $1.5 billion. Today, "of the wholesale banking group, corporate finance is still a material part of the numbers, but project finance is now the largest contributor within the corporate finance group," says Rathvon.

Maintaining the growth curve

The growth since 2003 has surprised even Rathvon: "My previous business at Bank of America took about 18-24 months to build. The problem I've had at Standard Chartered is that business has grown in 9-12 months, which means I've always been behind in hiring [although the group has grown from 20 to 70 since 2003]. We've more than doubled project and export revenues in 2.5 years."

Rathvon plans to double StanChart's project revenues again in the next 3-4 years – a significant task given the growing maturity and fight for market share in the Asian and Middle East regions that are Standard Chartered's lending ground of choice.

Furthermore, doubling revenue looks even more ambitious given how big Standard Chartered's project group has become in such a short ramp up – the bank has come from nowhere since 2003 to being fourth highest global climber in terms of mandated arranger volume for a bank (see Dealogic league tables 2005 on www.projectfinancemagazine.com), and second highest mandated arranger climber among banks with an international footprint – second only to HSH-Nordbank in terms of volume growth but with double the volume. Standard Chartered is also now number 10 globally in terms of advisory volume and sixth biggest mandated arranger of Middle East and African project loans.

But Rathvon is quietly confident: "We continue to see growth ramp up because the cross-border lending and M&A sides are very busy. We'll continue using project finance expertise in the broader corporate finance context. We've had the busiest first quarter ever and I've never seen the market this busy in 15-20 years."

ANZ acquisition

The ANZ acquisition doubled the StanChart portfolio in terms of historic deals booked, and several key deals closed in 2005 that had already been underway with ANZ. Rathvon does not rule out further acquisitions by the bank, although given the buoyant market, opportunities are likely to be rare. The ANZ move was a good one. "The transferred business complimented our own and operated primarily in the Middle East, Africa and South Asia with a bit from Europe and the Americas," says Rathvon.

But the acquisition, although significant and "and only a handful of bucks net of swaps etc," has not been the defining force in StanChart project growth. "The momentum was already underway," argues Rathvon, "and was augmented by some of the skills that came across. For example, the upstream oil and gas and Africa businesses are self generated – ANZ had only a little hydrocarbons experience and the total project business split is roughly 75/25 StanChart to ANZ.

"We basically proved ourselves internally in the same 12 months that the ANZ acquisition was going through. Just look at the footprint. Three years ago there was almost nothing in the Middle East. Then we did the first deal for the bank in Saudi Arabia and followed it with the first deal for the bank in Egypt."

Although not a driving force, the ANZ acquisition is symptomatic of the backing the project finance team has been given by senior StanChart management. "The bank's been really supportive," adds Rathvon. "They approached me and said we'd like to start a project finance group – and the questions I got asked were are you really going to be able to do 10-year deals? Are you really going to be able to deals in Saudi Arabia? The bank backed us and we are now doing 12-18 year deals in countries where we didn't have an office three years ago."

Building a new team

In 2003 Rathvon made a number of significant hires to get new teams in Singapore and Dubai off the ground. Deepa Pasamarty moved over from CSFB as a director in the new group and Conor McCoole, a former colleague of Rathvon's at Bank of America, was poached from UFJ Bank in Singapore. Ravi Suri was also enticed away from ABN Amro, to head up the Middle East project and export finance division in Dubai.

The growing footprint has spawned a number of further hires at all levels. Andy Barlett (ex-Standard Bank and Shell) now heads the global oil and gas team and all hydrocarbons for Africa. Rob Tims, formerly of Dresdner Kleinwort Wasserstein, has been appointed director in Bartlett's team in London. Bob Johnson, formerly of SG Asia, joined as head of the Hong Kong team in September. And Dung Ho, and Chris Ang all switched to StanChart from ABN Amro's Singapore office.

Kemei Sun and Jeffry Szeto have also joined StanChart in its Hong Kong office, working on expansion into greater China: Sun previously spent 11 years at WestLB, while Szeto worked at the Hong Kong government's Economic Development and Labour Bureau.

And Russell Kalam joined the London office along with Jonathan Hubbard, formerly an analyst of ANZ's metals, mining and shipping. Jai Gurtoo joined Ravi Suri's middle east team in Dubai as an associate, and Andrew Katz (ex-Merrill Lynch) now heads up chemicals M&A, reporting jointly to Rathvon and the head of corporate advisory.

Rathvon will be back in the recruitment market in the coming year and puts a premium on having the right team. "It was between ourselves and HSBC for the advisory mandate from Sinopec and ExxonMobil for the Fujian project and personally I think we would have won had we had the presence in Hong Kong – i.e. the six people we have we have now rather than the one person we had at the time."

One-stop shop

He also sees the project finance team as part of a machine rather than an individual entity. "We do something different from other groups – we are part of the corporate finance group and, I know other banks say it, but we really don't work in silos. We have an M&A and corporate finance advisory group and right now we are doing at least six M&A deals in chemicals and oil and gas. We have already completed several chemical M&A deals in Asia for Asian clients buying assets in Australia, Africa, Indonesia and Europe."

Project finance was initially conceived as a logical compliment to Standard Chartered's existing export finance business. Now, "because we are in the Middle East, Asia and Africa, all of which have common trade flows, we can combine our project and export skills with M&A. For example, I look at acquisitions for companies in China, which is, in effect, a project-like skills set. We are working on transactions from China to Africa, Latin America to Africa and the Middle East to Asia – and we are now number one M&A house in India," adds Rathvon.

"We're not deal-driven but relationship driven. It's an approach that enables us to cross-sell a lot of products. Around 80% of our transactions have something other than the debt – it could be swaps, cash accounts or corporate facilities that are more cash generating than a revolver. And we only do deals with clients of the bank – we won't do what we expect to be one-off transactions or be single product focused."

It is a strategy Rathvon believes pays off long term. "When a host of power companies were bidding for IWPPs in Saudi we were fortunate in that there were three companies that wanted us for advisory – European, Japanese and Singaporean companies. We already had a relationship with those companies and were able to choose which winner to back in which race. Thankfully we got it right in most instances, but even when we didn't we were generally asked to come in as mandated lead arrangers for the winners because so many of them were relationship clients."

The bank's key markets

There is no argument that StanChart's expansion in the Middle East has been successful. The bank has had a lead arranger status on most Gulf flagship projects in the past year including Qatofin and Q-Chem 2, Qasco, Qatargas 3, Taweelah B IWPP, Shuaibah IWPP, RasGas 2 & 3 and Qalhat LNG (for more details on all these deals search www.projectfinancemagazine.com).

Standard Chartered is also currently joint arranger – along with RBS, SMBC, Gulf International Bank, KfW and Mizuho – on the 20-year facility for the Al Hidd IWPP sponsored by International Power, Suez and Sumitomo, and has advisory roles on Barka 2, Marafiq and Shuqaiq.

However, with debt pricing under pressure in the region – a combination of high bank liquidity and EPC contractors negotiating better terms with sponsors, which then try and make back some of the extra cost by getting the debt pricing down or putting more risk on the lenders – Rathvon concedes StanChart's Middle East margin expectations could be hit.

"If bank liquidity stays as high as it is you will continue to see bond or even sub-bond pricing as project debt in the Middle East – how do you compete? Because of our presence we have the opportunity to go for the bulge deals where everyone is playing a role. But on some deals we are going to have to make tough decisions. On Rabigh, for example, we made the difficult decision to stay out [the $5.84 billion Rabigh debt package priced at 35bp during construction rising to as little as 65bp late in the 15-year term]. That said, we have a portfolio limit that still has ample room, and while we have underwriting and hold level standards that we adhere to, there are exceptions, for whatever reason, which we recognise as being just that – exceptions."

In addition to maintaining and growing its Middle East presence StanChart is making inroads into China as part of its Asian expansion. "We will do more advisory in China. It's a tough place like India – tough to lend, good to advise. Our strength is helping Chinese sponsors outside China because our footprint follows a similar trade pattern" says Rathvon.

Other Asian deals include corporate mandates from Reliance Infocomm and Tata Steel in India and an ongoing advisory mandate from Titan, for which StanChart close a second refinancing last year at significant cost saving to the sponsor (for more details search 'Titan' on www.projectfinancemagazine.com).

StanChart's third major market is Africa, where it has long had a significant trade and export finance presence and where the bank's project side is building. Current projects include advising Kenya Petroleum Refineries – owned by the Government of Kenya (50%), Shell (17.1%), BP (17.1%) and Chevron (15.8%) – on the Mombasa refinery upgrade; joint adviser with Calyon on the $1.8 billion Sonangol/Sinopec Block 18 borrowing base facility; and a repeat of the Vmobile Nigeria deal closed last year.

In February, StanChart was also joint lead on the $600 million Satellite Oil project for NNPC and ExxonMobil – the deal is an open ended facility structured in a similar way to the Vmobile deal, whereby additional debt for other projects can be added at a later date without having to renegotiate lender security.

More growth

Standard Chartered's new stamp on its key markets looks secure. And with the boom in the Middle East, growing opportunities in oil and gas in Africa, and Asia on the upturn, Rathvon will likely double project volumes again.

Whether Rathvon can double margin income is less certain. Unlike the major international banks StanChart does not have a high profile in low margin European or US PPP markets, and therefore no corporate client base to service in those markets. Its Middle East-Africa-Asia footprint is also a bonus in that those markets tend to produce the higher margin business and StanChart's growing list of corporate clients are looking at inter-regional cross-border opportunities in those same markets.

But with margins in the Middle East under heavy pressure – particularly in the Gulf's biggest growth market, Saudi Arabia, where project lending rates for sponsors like Aramco are at low corporate finance levels – and pricing in some Asian sectors, like power, at an all-time low, StanChart faces a bigger challenge second time around.

A selective lending policy – high margin work only – could conflict with the stated lending policy of servicing the bank's long-term client relationships. While doubling project revenues with low margin business could mean a lot of pain for little gain.

Rathvon is convinced that margins can be augmented with, for example, swap income (although this is also very tight at the moment). And his conviction is matched by the bank's actions – not only does he have the ability to add sizeably to the existing portfolio but the bank is looking at a general CDO that will include some of the project portfolio, thus freeing up cash for further lending. "We've already sold down some of our portfolio, bits that didn't fit in with our strategy," says Rathvon.

Rathvon is also sowing seeds in new sectors of opportunity, where higher margin work could be available – notably renewables in Asia. But with global bank liquidity high and ex-project banks returning to the market, the next two years are going to be even tougher than the first three.