Dubai: Middle East investment grade companies face refinancing needs of about $91 billion (Dh334 billion) from bank and bond debt due to mature over the next four years.

The refinancing needs of the region accounts for approximately 8 per cent of total Europe Middle East and Africa (EMEA) region’s bank and debt maturities of $1.17 trillion, according to Moody’s Investment Services.

The rating agency expects that the average investment grade corporate credit quality over the next four years will be stable to slightly improving, with liquidity remaining solid supported by the gradual macro-economic recovery.

Despite the trillion debt figure, Moody’s believes that investment grade refinancing volumes in EMEA are manageable within the normal capacity of capital markets. Nevertheless, the rater said there is an increasing flight to debt capital markets versus bank lending, which leaves fewer alternatives if capital markets experience turmoil in the future.

EMEA’s refinancing requirements between 2015 and 2018 comprise $322 billion in bank debt and $788 billion in bonds.

The volume of both bank and bond debt annual maturities will increase from 2015 to 2016. However, in the period 2016-2018, bond and bank maturities show a declining trend.

Fewer alternatives

“Moody’s expects EMEA investment grade corporate issuers’ liquidity remains solid. With gradual macro-economic recovery we expect average investment credit quality to be at least stable to slightly improving,” said Michel Carayon, Senior Vice President at Moody’s.

“We believe the volumes to be refinanced for investment grade corporates in EMEA are readily manageable within the normal capacity of capital markets even if the increasing recourse to debt capital markets versus bank debt may leave fewer alternatives if capital markets experience turmoil in the future,” said Carayon.

The upcoming maturities are largely the result of the credit boom in 2005-07 and the gradual bank disintermediation that has taken place over the past decade, and which intensified in the last few years as banks have focused more on rebuilding capital buffers than on increasing lending.

Of these maturities, only 28 per cent is bank debt, reflecting the gradual multi-year shift to capital markets financing from bank loans. Borrowing through the bond market has also become more attractive due to the opportunity to lock in low fixed interest rates for term financing.

The absolute level of refinancing needs appear as well manageable for these issuers over time. While there have been periods of market stress, most recently in 2012 when borrowing became more difficult for issuers in the periphery, while investment grade corporates in EMEA (including those in the periphery) have been able to access financing.

Attractive interest rate

“Many have issued debt to accumulate somewhat more cash than usual ahead of future required refinancing. This appears today as less necessary considering the available liquidity but over the past few quarters, interest rates have been very attractive, which may have motivated some corporates to borrow in advance, although the very low interest rates have made it less appealing to hold large cash balances for too long,” said Carayon.

While the results of this study show the cash cushion covering short-term maturities has increased versus 2013. Total investment grader debt maturities from April 2014 to April 2015 (including drawn portions of revolving credit facilities maturing) measured as of 31 March 2014 amounted to $604 billion.

The study shows that as maturities increase, the proportion of bank debt tends to decrease year after year, consistent with the tendency for bank debt to carry shorter tenors than bonds and banking deleveraging. However, in 2018 the proportion of bank debt maturing (26 per cent of total maturities) is slightly higher than in 2017 (24 per cent).

In summary, most of these maturities between 2015 and 2018 relate to bond rather than bank debt. The bond market has accommodated sustained issuance in a more benign euro area debt environment over most of the past year. Investment grade corporates have had and still enjoy strong appetite from investors despite low yields.