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Gulf faces rising refinancing risks over next three years

Region is entering a challenging cycle with absence of European banks

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Dubai: A combination of factors such as rising debt maturities, high volatility in global markets and the absence of European banks from the loan syndication market is expected to increase the refinancing risk in the Gulf region, according to rating agency Standard & Poor's and independent analysts.

Standard & Poor's Ratings Services said yesterday that issuers in the Gulf Cooperation Council (GCC) countries face rising refinancing risks over the next three years because the amount of debt maturing in the region will increase significantly between 2012 and 2014.

Industry experts estimate bonds and sukuk of about $25 billion (Dh91.95 billion) will mature in 2012, rising to about $35 billion in 2014. "We believe the region is entering a challenging loan and bond refinancing cycle, especially given the ongoing volatility in capital markets and fears that slowing global economic growth is already curbing corporate debt issuance and heightening refinancing risk," said Stuart Anderson, Managing Director and Regional Head, S&P Middle East.

Fluctuating yields

Several companies in the Gulf's corporate and infrastructure segments have delayed debt issuance to the capital markets which is expected to increase refinancing risks of these companies. Conditions for bond issuance in the Gulf took a turn for the worse in August 2011. Investors' increased risk aversion is keeping the markets highly volatile.

"The total bond issues from the region to be around two thirds of the volumes reported last year. In 2010, aggregate bond issuance from the Mena region exceeded $40 billion and the GCC accounted for $32 billion. The shortfall is likely to have its impact on refinancing," said Andrew Dell, HSBC's head of debt capital markets for Mena.

With bond yields fluctuating wildly, capital market sentiment has remained negative in the second half.

"Corporates with urgent refinancing needs have turned to banks. Regional banks in general have been accommodative as their liquidity and loans to deposit ratios improved," said Timucin Engin, Associate Director, Rating Analytical Financial Institutions at S&P.

Bankers fear that the absence of European banks from the Gulf's loan syndication market could apply additional pressure on refinancing risks in the region.

"Nearly 50 per cent of cross border loan syndications in the region comes from European banks. Massive deleveraging in Europe could mean these institutions will be virtually absent in the Gulf [syndication] market," V. Shankar, chief executive for Standard Chartered in Europe, Middle East, Africa and the Americas, told Gulf News recently.

Sovereigns to benefit

Among Gulf corporates, several companies have delayed bond issuances, which analysts say could accentuate refinancing risks.

"We have also seen less issuance in the rated GCC infrastructure and project finance sector. Although we believe that financing needs remain sizable, particularly in the power and water sectors, issuers that could afford to wait have generally held back from tapping capital and bank markets," said Karim Nassif, Associate Director, Infrastructure Finance.

S&P anticipates that Gulf sovereigns will continue to benefit from high oil prices and increases in hydrocarbon production, which are bolstering government finances and external accounts. Despite the strong economic growth supported by large scale government spending, the region's public finances are seen deteriorating structurally.

"Partly in response to the Arab Spring, many governments have increased spending on social transfers, wages, housing, and infrastructure. As a result, the dependence on hydrocarbon revenues to finance such spending has increased, which is reflected in higher non-oil budget deficits and increased break-even oil prices," said Anderson.

"With the global economy weakening in 2012, we think the main channel of impact for the GCC will be through weaker demand for hydrocarbons and hence lower oil prices," he said.