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04 October 2023

GCC companies to face challenge of refinancing $40bn debt this year

By Yazad Darasha

GCC companies will find it a challenge to refinance a total of $35 billion (Dh128.5bn) to $40bn worth of maturing debt instruments this year, new research has shown. Of this, approximately $20bn are associated with the UAE and $15bn are in Dubai.

"Addressing these maturities will be a significant challenge, although we do expect liquidity to return to the markets as 2009 progresses, and bond spreads to recede from some of the panic-stricken levels seen in the second half of 2008," Moody's Investors Service said in a corporate finance outlook.

As markets re-open, issuers with sound credit fundamentals and government backing should be able to close financing transactions, "but these come at a price", Moody's said.

"The end of cheap money has also reached the Middle East, and we expect companies will have to accept far more expensive funding going forward in return for better long-term liquidity.

"In turn, we see new rating activity remaining steady with greater need for differentiation of credit risk and in line with companies' attempts to lock in liquidity as it becomes available," it said.

A majority of UAE corporate fund-raising in 2008 used syndicated bank financing as access to equity markets dried up, the report said. Credit quality is expected to decline in 2009, as companies adapt their ambitious plans to the new reality.

UAE syndicated bank financing volumes rose from $50bn in 2007 to nearly $115bn in 2008, Moody's said. "Under more conducive circumstances, a far larger proportion of these funds would have originated from the capital markets.

"Instead, total GCC sukuk issuance declined from $18.7bn in 2007 to $8.4bn in 2008, with corporate sukuk issuance falling from $16.1bn in 2007 to $7bn in 2008," Moody's said.

Conventional bond issuance in the GCC dropped marginally from $20bn in 2007 to $19.7bn in 2008, with corporate conventional issuance contracting sharply from $7.6bn to $3bn.

Total corporate issuance (Islamic and conventional) dropped from $23.7bn in 2007 to $10bn in 2008, Moody's said, citing punitive spreads and "complete lack of access" as the reasons.

Total rated corporate debt (excluding structured and project finance debt) in the GCC reached $20.4bn at year-end 2008.

This was heavily concentrated among government-related issuers, which make up 94 per cent of that amount, Moody's said.

UAE issuers represent 90 per cent of total rated debt outstanding, with Dubai alone representing 51 per cent and Abu Dhabi's share at 39 per cent.

Most of Abu Dhabi's share comes from the bond issues by Abu Dhabi National Energy Company (Taqa).

Credit quality has declined as key markets – in particular real estate and regional stock markets – have succumbed to global pressure, the report said. "As the year 2008 progressed, the financial woes of the world reached the shores of the Gulf, resulting in a severe slowdown of core real estate markets [notably Dubai, but also Abu Dhabi and Doha] as financing and liquidity dried up.

"A sharp decline in oil prices from close to $150 per barrel to below $40 has also had an impact, less so immediately on sovereign budgets, but on available cash liquidity that has also been fuelling local real estate markets.

"Fundamental credit quality is likely to be tested in the downturn. Overall credit quality in the region has declined, and is likely to continue to do so going forward," Moody's said.

Baseline credit assessments – the measure of a company's creditworthiness excluding any exceptional government support – are likely to be tested in the downturn.

Moody's has already taken several negative rating actions on Gulf companies. However, given the high proportion of government-related entities in the region, the link to sovereign credit quality and thus actions taken by respective governments is particularly high.

The rating agency said it will regularly monitor financial parameters to assess a company's performance in a weaker market.

Companies have reviewed their ambitious investment plans and have started to defer or cancel discretionary spending in anticipation of lower demand from some of the region's key trading partners – be it for oil or the more contemporary financial services, tourism, real estate and re-export.

"[Clearing the] issuance backlog will depend on market conditions, as managing liquidity and reacting to challenging markets take centre stage. While new debt issuance is likely to be subdued, there remain material refinancing needs throughout the region, as many companies were forced to arrange shorter term financing in the banking markets rather than accessing punitive or unavailable public debt markets.

"We expect companies' business plans to change substantially, as they adapt to a new environment. Accordingly, we will be closely monitoring those companies, whose ratings and underpinning financial metrics rely on assumptions that may no longer be achievable," Moody's said.

The agency expects the largest impact on sectors that have been particularly hard affected, such as real estate, trade, tourism, commodities and sectors impacted by falling demand or financing shortfalls. Despite oil prices falling below $40 per barrel, Moody's assumes oil in the region of $50 for 2009. It sees GCC budgets being able to withstand the pressures of lower oil-export income.

"While the fundamentals of the hydrocarbon sector point towards rising long- term oil prices, a period of weakness is likely during times of global recession.

"Government balance sheets have remained only moderately affected by lower oil prices, given the substantial liquidity most have amassed in their sovereign wealth funds over the past years."

However, companies in the energy sector, or companies that rely heavily on the energy sector for funding, may be more affected, it said. Whether or not the rating profiles of such companies will come under pressure will depend on cash flow and debt metrics.

"While we will also monitor any changes to governments' investment plans in core infrastructure projects, we so far take comfort from most governments' initiatives to maintain their budgets at very high levels, particularly for core long-term infrastructure projects," Moody's said.

Government support

As much as 94 per cent of all Moody's-rated corporate debt in the GCC is with government-related issuers whose ratings commonly include an uplift from the prospect of government support in times of crises. The prominent rating sensitivity is how governments will react, should such crises occur.

"Our assumption is the Gulf political landscape tends to be highly interventionist as far as the financial health of its flagship corporates and financial institutions is concerned," Moody's said.

"The opportunity costs involved in allowing a major government-owned entity to default, including reputational loss and political fallout, would far outweigh the relative amounts involved to provide an individual bail-out, particularly given the substantial available liquidity of most Gulf governments.

"However, we also highlight that the region has never been economically tested on such a grand scale," it said.