A rising tide of debt reaching maturity in the Gulf region poses a heightened refinancing challenge over the next three years, say analysts, with companies looking for new avenues of financing to repay obligations coming due amid volatility in global capital markets.
"The way both the Arab Spring and the European debt crisis is affecting the region is by a rise in risk aversion and higher risk premiums from the market, which does not create a favorable environment to tap the debt market," said Philippe Dauba-Pantanacce, senior economist for the Middle East and North Africa at Standard Chartered Bank.
"There are, however, other sources of funding," Mr. Pantanacce added. "Tapping the debt market is only a recent development in a region where capital markets are still relatively underdeveloped."
About $25 billion in bonds and sukuk, or Islamic bonds, from Gulf issuers will fall due in 2012, with the annual maturity total rising to about $35 billion in 2014, according to a report by the rating agency Standard & Poor's. Most of those come from the United Arab Emirates and Qatar, both of which relied heavily on foreign capital during the boom years 2006-7, according to the rating agency Moody's Investor Services. Most of the instruments, which were for five years, are coming in the next year to 18 months.
Much of the maturing paper is issued by major quasi-government entities, like Dubai's DIFC Investments and Jebel Ali Free Zone, which have $2 billion and $1.25 billion maturing next year, respectively. The Abu Dhabi real estate developer Aldar has a $1.25 billion bond maturing in 2014 and a $1.2 billion sukuk maturing in 2013.
In Saudi Arabia, the real estate developer Dar Al Arkan has three separate bonds maturing over the next few years, including a 3.75 billion Saudi riyal, or $1 billion, sukuk due in July 2012, a 750 million riyal bond maturing in 2014 and a 1.75 billion riyal bond maturing in 2015.
While these are healthy signs of growing capital markets, analysts say that the Arab Spring and the European debt crisis will mean tougher conditions for raising funds through the capital markets in the future, particularly for any new projects.
"If we assume that capital markets are back to normal around the world, the $25 billion debt obligation figure for next year is not really a big deal and we can assume that oil-rich governments will likely provide support, if necessary," said Mahdi Mattar, head of research and senior economist at CAPM Investment in Abu Dhabi. "However, in the case we are in now with Europe's debt crisis and the U.S. not showing growth, then we have a shutdown of capital markets globally and this will obviously affect the region and the credit-worthiness of regional companies."
Amid volatile bond yields and generally negative sentiment in the capital markets since June, S.&P. said that none of the companies that it rates had tried to raise funds in the capital markets in the past six months. Instead, corporate issuers with refinancing needs have turned to banks.
There have also been fewer issues by rated infrastructure companies in Gulf Cooperation Council, or GCC, countries. Although financing needs remained sizable, particularly in the power and water sectors for utilities like Saudi Electric, issuers that could afford to wait had generally held back from tapping capital and bank markets, hoping that pricing conditions would improve, the S&P report said.
For example, TAQA, the Abu Dhabi national energy company, announced plans for a 3.5 billion Malaysian ringgit, or $1.1 billion, sukuk program in early October, but volatile market conditions have stalled the issue, analysts say.
"What we've noticed is that entities with upcoming refinancing risk haven't been issuing in the market and entities that need financing right now have not raised it either," said Karim Nassif, an analyst at S.&P. "The TAQA example shows that market conditions may not be compelling enough right now, that the market is subdued."
The landscape has also changed for bank lending. European banks, which were traditionally very active in financing projects in the G.C.C. area, are now focused on reducing their loan exposure and building up their capital, and as a result, they are pulling back from financing in the Gulf, according to Khalid Howladar, an analyst at Moody's.
"A sustained retrenchment of foreign capital will create a shortfall that should push more of these local corporates to seek alternative means of financing," Mr. Howladar said.
A lot of the funding from European banks was for project financing, like infrastructure, power and water developments, particularly in Saudi Arabia and Qatar. French banks are typically strong in this area, Mr. Howladar said: but they are now "having some of the biggest problems," and, he added, they are pulling back from financing projects in the Gulf as a result.
This month, the $10 billion Barzan gas project in Qatar secured financing from 31 lenders, but the three biggest French banks - BNP Paribas, Société Général and Natixis - were notably absent.
"Those guys are usually very active and this is a material sign that European lenders are holding back," said Mr. Howladar. "As a result, regional borrowers have to either go East or seek funding from capital markets or other means going forward. European banks are focusing on problems closer to home."
©2011 The New York Times News Service
