Is the Middle East an emerging market? Compare the credit ratings for Japan with that of Qatar. Standard & Poor's, recently upgraded Qatar's local currency and foreign currency ratings to A- and A-2 (short-term), with a positive outlook. Compare that with Japan's AA- and A-1 with a negative outlook.

And if the credit ratings in Gulf coast countries such as Qatar, Oman and Abu Dhabi are not typically emerging, neither is the pricing on some of the project finance deals.

While the highly volatile political situation in Israel threatens to undermine the progress of infrastructure projects there and in Jordan, countries such as Oman, Bahrain Qatar, Abu Dhabi, the United Arab Emirates and Saudi Arabia remain firmly on the agenda for banks and sponsors. These countries offer deals in prized sectors such as oil, gas to liquids, liquefied natural gas and power and often with implicit government guarantees either via state-owned sponsors or through state-owned off-takers.

?On the whole, the regimes are very stable,? says Raouf Jundi, vice president syndications at Bank of Toyko-Mitsubishi in London, ?and generally speaking for a government-related project to go bad is a loss of face in the Middle East. Of course in power projects there is a government guarantee backing the obligations of the offtaker but additionally you can't imagine a country such as Abu Dhabi getting rid of its power strategy.?

Says Geoff Knox, director and head of the power, infrastructure & mining project and structured finance department at ANZ in London: ?The Middle East is one of the few investment grade markets where companies can get long-term investment grade offtake.? And all this in a project finance climate, which, in the case of power deals, is increasingly favouring the safety of power-purchase agreements ? particularly in the wake of the crisis in the US power market following the upset in the Californian merchant power market.

Although the contractual nature of deals in the power sector provides comfort, these guarantees are peculiar to the market. In oil and gas deals, the government may have involvement through the sponsor company but once the deal is done the banks are taking on market risk, albeit with a deal that is lower-geared and with shorter tenors.

Nevertheless pricing on deals in this region has become extremely competitive over the past few years. In the first half of last year appetite for deals in some Gulf state countries was so strong that margins were being driven down to levels almost comparable to the UK, with some as low as 75bp.

The wider implications of the attacks on the US on September 11 clearly had repercussions for deals in the Middle East as they did everywhere. But bankers claim the effects, when combined with the fallout from Enron, had only a marginal influence on the pricing ? with margins up about 15 basis points over Libor ? and shorter tenors for some deals. Good deals have still closed since September, albeit with refined structures. But with a dearth of deals in the market at the moment, the question is whether the market has really been tested.

One of the most telling transactions in terms of the way it responded post September 11, was in the United Arab Emirates. Shuweihat, an independent water and power (IWPP) project sponsored by CMS and International Power, launched syndication of its $1.6 billion debt, 20-year debt facility on September 10 2001. Given the events that unfolded the next day it is unsurprising that take-up for the transaction was not strong in the first few weeks after September 11.

Nevertheless as Sikander Zaman, managing director in the project finance group at Citibank in London, says, Shuweihat may have launched on September 10 but the arranging banks still managed to close the deal in early December.

However, the pricing did change. Says Zaman: ?In consultation with the sponsor ? it was only a 15 basis points increase on the original post-completion price. In the context of a $1.6 billion deal and the September 11 event, that is not that big.?

The 20-year debt was priced at 110bp pre completion; at 115bp post completion to seven years, ratcheting up to 175bp in phases over the 20-year tenor.

Zaman says banks joining the deal were more cautious about the roles they were taking in the deal. ?When we went to sub-underwriting, not much happened for a few weeks following September 11. Syndications departments were hesitant to sub-underwrite. So we changed the structure of the deal to give larger take-and-holds.?

Consequently banks joined as arrangers at $50 million take and hold ? at 90bp; senior co-arrangers at $40 million take and hold ? at 75bp.

?The Islamic financing was a more significant development in the deal. It bridged the gap and helped closed syndication,? says Zaman. Abu Dhabi Islamic Bank led $250 million Islamic tranche in an arranging group which included Abu Dhabi Investments Company, Bank of Tokyo Mitsubishi, Barclays Capital (co-ordinators and bookrunners), Citibank (co-ordinators and bookrunners), KfW, National Bank of Abu Dhabi and Royal Bank of Scotland.

?We had discussed an Islamic tranche before but initially it seemed it would complicate the deal,? says Zaman. ?In fact it was very quick and we were able to change the documentation and close the deal within six weeks.?

Indeed BTM's Jundi says Islamic financing has become increasingly important for project finance deals. ?Islamic banks are under pressure to find assets to lend to and generally the governments try to encourage this. These banks provide an added source of liquidity. The structure has certainly evolved over the past years and now the two structures are able to sit side by side.?

In fact one banker said that post September 11, it was the regional banks who remained the most consistent and firm bringing encouragement to the internationals.

Two other deals also in the market in September, were Oman LNG and the Ras Laffan Power and Water Desalinisation Project. Both deals also managed to close in tough conditions.

In all cases the deals emerged had refined structures but they still got done. In the case of Oman LNG, the sponsors ? Oman Shell, Total Oman, Korea LNG, Mitsubishi, Mitsui, Partex and Itochu ? decided to go ahead with the deal even when they did not have to. This gave confidence to the market and the $1.364 billion deal that signed received strong interest from a bank market hungry from transactions. The arranging banks were ABC, Apicorp, ANZ, BoT-Mitsubishi, Credit Agricole Indosuez, Credit Lyonnais, Gulf International Bank, HSBC, Mizuho, RBS and SMBC. Pricing on the 16.5-year deal, $1.3 billion term loan started at 90bp for the first five years rising to 110bp from years to six to 10 and then 140bp to maturity.

In the event the $572.25 million, 18-year loan for Ras Laffan Power and Water Desalination performed well in syndication but again with modified pricing and tenors. Arranging banks were ANZ, BoT-Mitsubishi, Barclays Capital, BNP Paribas, Gulf International Bank, HSBC, IBJ, Qatar National Bank and SG.

But for these types of deals ?the market has certainly become more selective for project finance transactions,? says Citibank's Zaman. ?So the banks are being more selective in the titles they get and the fees they earn.?

Adjustments in pricing may, however, have balanced an over aggressive market pre-September. Says Gary Griffiths, head of primary markets for the UK, Europe, Middle East and South Asia at ANZ in London: ?As a rule, we have a very imperfect market. Pre-September 11 pricing was unrealistic and didn't adequately reflect the risks. The risk-reward ratio was the product of an aggressive market. Post September 11 there was an adjustment. Shuweihat, which launched on September 10, had to be flexed in structure and price whilst other deals had to reflect changed sentiment.?

Since the end of last year there has also been a shift in the percentage of funds provided by local providers. Says Griffiths: ?Before September it was about 60/40 international lending to local. After September that flipped.?

Despite the level of confidence for these three deals, some argue that the market has not truly been tested. Of this year's deals Salalah, a $225 million financing for a power generation and supply project sponsored by PSEG Global in Oman, dawdled through syndication. The final syndication group for the 16.5-year deal, arranged by BNP Paribas and WestLB, included a strong presence from regional banks with National Bank of Oman, Bank of Muscat, Oman Arab Bank and Bank of Dhofar joining international banks Mizuho and SMBC.

The close this month of the $646 million debt package for Oman India Fertiliser Company project provides the market with an unusual and perhaps one-off deal. The deal was some time in the pipeline, the original memorandum of understanding being signed in 1994, although this can be attributed much more to the contractual debate that ensued than any fallout from September 11. In fact banks were wary of having India as the primary offtaker of the fertiliser. However, this risk is mitigated by a 100% offtake obligation by the Government of India under the terms of a 15-year take or pay basis.

The restructured deal that emerged has a shorter tenor ? 12.5 years ? and fairly generous pricing ? the commercial facility pays 175bp pre-completion and ratcheting up from 200bp to 235bp to maturity. In addition the French and Italian export credit agencies, Coface and Sace provided support on the back of Technip and Snamprogetti's involvement in the project.

As BNP Paribas' Laurent Devin, vice president in the project finance department in London, points out, in the restructured deal market risk, offtake risk and gas price risk have all been removed. The transaction also had fixed revenues and fixed costs ? the Government of Oman is supply gas under a 20-year agreement and India has a 15-year offtake agreement.

With so few deals in the market, however, all eyes are on the next round of projects. The list of possibilities is long. Egypt, for example, has a number of projects on in the offing but many of these are likely to involve export credit agency involvement.

Among deals in the power sector are Umm al-Nar IWPP, another stage of Taweelah, Fujairah, Barka II, Sohar and Ras Fontas B2. Umm al-Nar, an IWPP in Abu Dhabi, is expected to test the length of tenors for power deals post-Shuweihat.

Interest is also growing for Aluminium Bahrain (Alba), which is in early stages of looking for an adviser for its $1.7 billion expansion programme. Meanwhile, the high level of interest from banks submitting bids for the arranging banks for Bahrain Petroleum Corporation's expansion project shows the level of hunger in the market.

In the next month RBS, as advisor, is expected to announce details of a gas to liquids deal in Qatar. Michael Crosland, senior director at RBS in London, believes ?all the auguries are very good. Banks are looking for the next big deal to fill the gap in the calendar.? The $750 million deal, sponsored by Sasol of South Africa and Qatar Petroleum, is already attracting strong interest from the bank market, with the project's information memorandum due in July.

RBS has also just secured the advisory mandate for Qatar Chemicals Company, although the $1.1 billion deal is not expected to close until the second half of 2003. Other prized deals in the region, such as the next train of Ras Laffan LNG project in Qatar and the Dolphin project, are also likely to kick off in the second half of this year and beginning of next year. The Dolphin project will develop a 440km gas pipeline linking Qatar's North Field with markets in Abu Dhabi and Dubai. Occidental Petroleum recently took Enron's stake in the Dolphin Energy consortium.

Stephanie Hudson, director in the oil, gas and petrochemicals department at ANZ in London, says a number of these expansions of petrochemical deals expected next year could be what really tests the market. ?They might provide more of a litmus test on the extent to which the market has regularised.?

The Middle East is still proving a strong lure for banks and sponsors alike. Even given the events of September 11 the market has already shown it has recovered and very few of the banks are holding back on the region. ?Banks have short memories,? says Jundi. ?If they are hungry for business, deals will get done.?