Dubai: Gulf Arab companies and governments, facing over $60 billion (Dh220 billion) of maturing debt to refinance in 2012, will increasingly need to move away from relying on traditional funding and embrace "out of the box" thinking in a tough global environment.

The Gulf Cooperation Council states, most flush with cash after a year of high oil prices, are likely to succeed in handling this year's refinancing challenge without systemic crises. Governments will intervene if needed to avert big, corporate bond defaults that might destabilise markets.

But the process will not always be smooth; unfavourable market conditions, including weak real estate prices, and the uncertain outlook for the global economy mean some debtors will probably resort to restructuring liabilities in talks with creditors.

Other firms may avoid restructuring this year only by turning to options beyond the traditional choices of bank loans and the bond market. Unorthodox financing tools are already becoming more prevalent in the region, such as securitisation and repurchase agreements, in which securities are temporarily transferred for a set period in exchange for capital.

"I think that the pressure points will be accommodated. The immediate priority is dealing with the refinancings," said Stuart Anderson, managing director and regional head for the Middle East at credit rating agency Standard & Poor's.

The need to use unorthodox steps will be more urgent for smaller firms in the private sector, whose financing channels will be tightly restricted, but even large government-related entities may try to wean themselves off bank loans.

"Bank lines may be cheaper but diversity is the more rational approach as you preserve credit headroom and improve balance sheet structure," Anderson said.

The task is complicated, however, by the withdrawal from the Gulf of European banks over the past year because of debt problems at home. This is forcing borrowers to re-evaluate funding strategies, since the Europeans previously provided around 50 per cent of bank finance in the GCC.

"The interconnectedness of the global banking system makes funding difficult and will undoubtedly have a knock-on effect on regional financing options," said Ganem Nussaibah, founder of Cornerstone Global Associates.

Bank loans into the region fell to $14.9 billion in the second half of 2011 from $26.9 billion in the same period of 2010, according to Thomson Reuters data.

"The days of billion-dollar syndications are well and truly gone," said a banker at a regional bank, who spoke on condition of anonymity. "Banks will have to be innovative and fleet of foot, raising $100-$200 million here and there."

Outside Europe

Some banks will look for loans from institutions outside Europe — US and Asian, particularly Chinese, banks are often mentioned. Many will hope to convince banks with which they have longstanding business ties to roll maturities into new loans.

However, "sadly for any debt refinancing, the success or otherwise of such debt roll-overs in 2012 will depend on sentiment emanating from the global sovereign debt crisis," said Daniel Broby, chief investment officer at London-based asset manager Silk Invest.

One likely result is that borrowers will rely on a reduced number of banks to provide loan funding. This could result in borrowers bumping up against lending limits for individual institutions, according to S&P's Anderson.

"The question is to what extent can banks in the region, due to the slowdown of the syndication and club loan market, take on more exposure to the larger names? When does this become an issue for banks' credit concentrations, and will regulators take a closer look at this?" he said.

In a report on Emirates NBD, Moody's Investors Service noted that as of September 2011, 24 per cent of the bank's loan book was linked to Dubai government-related entities.

"Such high and increasing levels of related-party exposures are a major constraint on our assessment of the bank's risk positioning," the agency said in the late January report.

The problem has already been experienced in Saudi Arabia among big construction firms, which have been forced to diversify their funding away from cheap loans from Saudi banks.

Saudi Binladin Group has looked to local investors, printing two short-term sukuk, while Saudi Oger has sought to raise $2 billion from banks outside the kingdom — a process which began in March 2011 and has yet to reach a conclusion.

If borrowers are unable to access private sources of money, governments may have to act.

"You end up with the situation of local banks being stuck at the regulatory limits and if push comes to shove and you need to solve the problems at the government entities, then I see some flexibility to step up," said a source at an international bank.

Government support

In December, Abu Dhabi's government provided Dh16.8 billion of financial aid to Aldar Properties in order to ease the property developer's cash situation.

This was an important signal of Abu Dhabi's intentions: it will not permit any default that might damage the debt market for the mass of firms.

Shaikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee, declared in December that upcoming bonds at the emirate's state-linked firms would not be restructured, though the government might look into refinancing part of the debts, presumably through issuing new debt.

Governments in the Gulf are financially strong enough to support affiliated firms. A Reuters poll of analysts in December predicted the UAE, for example, would run a budget surplus of 6.0 per cent of gross domestic product in 2012 after 8.0 per cent last year.

Bahrain could count on additional aid from Saudi Arabia, analysts believe.

Markets' confidence that the Gulf will avoid systemic crises over debt refinancings is not absolute, however.

Dubai's five-year sovereign credit default swaps trade around 420 basis points (bps); while that is well down from highs above 650 bps in February 2010, it is still far above levels for strong Gulf states such as Saudi Arabia, now around 135 bps.

And government support for companies is not unlimited in range; it is expected to be extended only to entities which are regarded as strategically important.

Bank funding

While the exact figure is not known, Gulf entities have already restructured or entered talks to restructure tens of billions of dollars of debt since the global financial crisis erupted in 2008, bursting credit and real estate bubbles in the GCC.

Many of the restructuring negotiations are not made public.

Roughly $80 billion of loans, conventional bonds and sukuk matured in the GCC last year, according to calculations based on estimates from Thomson Reuters and regional financial firm Markaz. Total maturities are estimated at around $69 billion this year, $45 billion in 2013 and $51 billion in 2014. So if the region can get through this year without major instability, it has good prospects of coping with the rest of the fallout from the financial crisis.