* Sanctions so far don't force banks to sell Qatari assets
* This could change if diplomatic crisis continues
* Lawyer sees chance of "fire sale in tradable securities"
* Banks check documents for force majeure option
* Qatari loans not being sold in secondary market so far
By Davide Barbuscia
DUBAI, June 19 Commercial banks in the Gulf are
examining their books and consulting lawyers to determine their
strategies if the region's diplomatic crisis eventually forces
them to sell off Qatari bonds and loans.
So far, sanctions against Doha imposed by Saudi Arabia, the
United Arab Emirates and Bahrain have stopped well short of
compelling banks under their jurisdiction - including regional
branches of international banks - to unload Qatari assets.
The UAE central bank asked banks to apply "enhanced customer
due diligence" when dealing with six Qatari banks, making UAE
institutions reluctant to do fresh deals. Guidance from the
Saudi and Bahraini central banks has also deterred new business.
But banks across the Gulf have mostly held onto their
existing stock of Qatari bonds and loans, hoping to avoid mass
selling that could force them to book losses.
That could change, however, if the diplomatic crisis drags
on and Saudi Arabia or the UAE decide to impose harsher
sanctions on Qatar, which they accuse of backing terrorism - an
allegation Doha denies.
For example, there could be formal or informal guidance to
banks to dump Qatari debt. Local banks in Saudi Arabia, the UAE
and Bahrain, many of them partly state-owned, would find it hard
to ignore such guidance, and once their selling had begun,
international banks might sell to avoid losses.
“From a new transaction perspective, people are already
extra-cautious, but for existing paper at the moment the
sanctions have no implication," said a Dubai-based lawyer
specialising in debt capital markets.
"But if the UAE central bank tells banks they cannot hold
Qatari paper, you might expect a fire sale in tradable
securities such as bonds and sukuk, which would be sold to
The lawyer spoke on condition of anonymity because his firm,
like many others in the region, has responded to the political
tensions by asking its lawyers to refrain from commenting
publicly on Qatar-related issues.
Since early 2014, over $20 billion in international bonds
have been issued from Qatar by companies, banks and the
government, Thomson Reuters data shows.
Yields on Qatar’s sovereign dollar bonds
jumped over 40 basis points after the sanctions were announced
on June 5 but have since fallen back nearly 20 bps, suggesting
many bank investors still see Qatar as attractive. Some Qatari
corporate bonds have been hit much harder.
A ban on holding Qatari assets could be more disruptive to
loans than to bonds, another debt capital markets lawyer in
Dubai said. That is because banks which extended the loans would
search the documentation for ways to force borrowers to repay
the loans early.
"A bank could go back to the loan documentation to trigger
prepayments based on illegality clauses," he said.
A ban imposed by the UAE would affect not only UAE banks but
also loans that international banks had booked from their UAE
branches, the lawyer added. The UAE serves as the Gulf's main
Qatari banks and companies have raised more than $23 billion
through syndicated loans since early 2014, according to Thomson
Lenders would search documentation for the right to declare
"force majeure" - an unforeseeable event freeing them from their
obligation. Many or most loan documents have a clause providing
for this, bankers said.
Michael O’Kane, senior partner at legal firm Peters & Peters
in London, who has expertise in international sanctions, said:
“Force majeure can usually only be relied upon with confidence
if explicitly set out in a clause in the loan agreement, and if
the sanctions imposed trigger that clause."
Sanctions would have to be official to permit banks to act,
said a Dubai-based banker at an international financial
institution with heavy exposure to Qatari banks; unofficial
guidance would not give them enough justification.
A European banker said his institution, which has
traditionally lent extensively to Qatari banks, was not taking
any action at this stage, though credit departments in the
industry were becoming nervous.
“There aren't many Qatari loans maturing before the end of
this year so there is no pressure to do new business and quite a
lot of time for the situation to unfold," he said.
Banks could also try to sell Qatari loans in the secondary
market. When Russia was hit by economic sanctions in 2014 the
secondary loan market was flooded with Russian paper, and the
same happened with Turkish loans after the coup attempt in
Turkey last year, traders said.
So far, Qatari loans do not appear to have suffered the same
fate. Some of Qatar National Bank's loan paper was
spotted in the secondary market this month, a trader said, but
he added that the price had not dropped and that Qatari banks’
loans remained very illiquid – suggesting most banks were still
holding their Qatari exposure.
(Editing by Andrew Torchia and Alison Williams)