Dubai: A series of rating downgrades, corporate defaults and scandals took their toll on debt issues from the region during the last two quarters. Investment bankers and rating agencies say there is still a strong line-up of regional firms and banks that are waiting for market conditions to improve.

"We are actively involved in a number of high profile mandates in the region and sees significant opportunities for the rest of the year," said Jacco Keijzer, executive director and head of Royal Bank of Scotland.

Last year saw a huge migration of Gulf borrowers from bank lending to debt capital markets, largely driven by shortage of liquidity in the (bank) syndication market and demand for longer term funding requirements.

Regional banks, on the other hand, hit by high provisions and asset liability mismatches on their balance sheets (created by lending long term against short term deposits) were looking at the medium term note programmes (MTNs).

The practice of name lending to family businesses in the region has received a big setback due to corporate scandals such as the one that involved Saudi Arabia's Saad and Alghosaibi Groups which together left a trail of $15 billion (Dh55.08 billion) non-performing loans on the books of nearly a dozen regional and international banks. With banks growing more reluctant to lend to family businesses analysts say many of them will be forced to look at debt markets as an alternative. With equity markets yet to recover from the slump, corporate bond issues are seen as the only viable alternative.

Despite the several credit events and that brought bad publicity and rating downgrades regional debt sales in the first quarter of 2010 exceeded $3 billion. Bahrain's government, Saudi Arabian developer Dar Al Arkan, National Bank of Abu Dhabi and Banque Saudi Fransi have all issued bonds since Dubai World announced its request for a standstill in late November. While smaller, private companies may still struggle to raise capital, and the average tenor of bonds is likely to remain at five years, some bankers predict that Gulf issuance may potentially surpass last year's record $41 billion, led by sovereign, quasi-sovereign and bank bond sales.

Last year Abu Dhabi made the first move in April 2009 by announcing sovereign bond programme. The emirate and its various government related entities (GREs) issued more than $12 billion worth bonds in 2009. According to bankers various sovereign and quasi-sovereign issues attracted orders of $56 billion in bids signaling huge appetite for Gulf debt issues.

Huge potential

Currently there is about $120 billion of outstanding sovereign and corporate bonds in the Gulf with the majority issued by governments and financial institutions. This accounts for only about a 10th of the region's gross domestic product, leaving huge potential for future issues for regional governments and private sector issuers.

With clear signs of improvement in demand for regional debt, bankers expect some of the highly rated sovereign issuers and GREs to lead the way and provide the much needed benchmark yield curve which lower rated companies can use as a pricing guideline. However, they expect pricing differences among corporate issuers are to remain wider.

"We expect, notwithstanding the success of the Dewa's debt placement, liquidity and refinancing concerns will continue to weigh on investor perceptions for the foreseeable future while the market continues to assess and differentiate between the track records of each of the individual corporates in the region," said an analyst with Moody's.