Dubai: Gulf Cooperation Council (GCC) corporate and infrastructure capital market issuance, 2017 is shaping up to be a bumper year. Volumes are already more than double those of last year — with almost two months still to go, according to data from rating agency Standard & Poor’s (S&P)
Sukuk issuance is on the rise in the Gulf Cooperation Council (GCC) region for corporate and infrastructure financing. Through the first nine months of 2017, issuance in this segment increased to $6.8 billion (Dh24.9 billion), up from $2.8 billion during the same period of 2016. And sukuk issuance came to more than half the total of all corporate and infrastructure debt of $12 billion for the 2017’s first three quarters.
This growth suggests some improvement in overall capital market activity, even though the number of corporate sukuk issuers remains low. The GCC currently faces high infrastructure project spending requirements of what S&P Global Ratings estimates to be about $120 billion-$150 billion annually (including transport-related projects) between now and 2019. It also faces refinancing needs of $23.6 billion in corporate capital market debt due between 2017 and 2019. This notwithstanding, the possibility of evolving geopolitical uncertainties can also have refinancing risks. Therefore, corporate and infrastructure sukuk could over time begin to reflect a higher share of overall issuance.
“As central banks hike interest rates along with the US Federal Reserve, and with significant political uncertainty hanging over the region, issuers are keen to lock in long-term funding at still attractive rates. Single-exposure limits on banks are also forcing some GCC issuers to diversify funding sources,” said Tommy J Trask, a credit analyst with S&P.
According to S&P analysts, the budget-constrained GCC governments are increasingly looking to their government-related entities (GRE) to tap capital markets for corporate and project bonds to complement record sovereign debt issuance. Two recent examples are Abu Dhabi Crude Oil Pipeline LLC (ADCOP) issuing $3 billion of project bonds and Nogaholding issuing $1 billion of bonds.
“With government budget deficits remaining substantial, we expect this trend to continue into 201,” said Trask.
Yields edge up
Bond and sukuk yields are up about 50 basis points year on year, partly in response to increasing political tensions in the region, but not to the extent that the higher borrowing costs have material ratings implications. Sukuk yields have risen more than those for bonds, and corporate sukuk issuance volumes fell dramatically in the second half of 2017 versus the first half.
“We see political risk, energy subsidies, and tax reform across the GCC as some of key risks to the region’s corporate ratings. A reduction in energy subsidies may weaken the operating performance of utilities and downstream oil and gas companies to the extent that it isn’t compensated for by tariff reform or other support measures,” said Karim Nassif, a credit analyst at S&P.
Highly aggressive tariff reform that would rapidly increase electricity and water tariffs can also have negative consequences for demand and the economy as whole. The introduction of a value-added tax across the GCC starting in 2018 could further dampen regional domestic demand and economic activity.
The most unpredictable and significant risk factor is political risk, most notably the increasing tensions between Saudi Arabia and Iran playing out in Bahrain, Iraq, Lebanon, Qatar, Syria, and Yemen, charges of corruption against ministers and leading business figures in Saudi Arabia, and the ongoing trade embargo of Qatar, S&P analysts said in a note.
