Gulf refinancing risks mount amid euro zone debt crisis

19/11/2011 00:00 AST

The Gulf region is entering a challenging loan and bond refinancing cycle, a top rating agency warned as fear over European banks' exposure to risky government debt continues to stalk markets.

According to Standard and Poor's, industry experts estimate bonds and sukuk of about $25 billion will mature in 2012, rising to about $35 billion in 2014.

The agency, however, stressed that Gulf sovereigns will continue to benefit from high oil prices and increases in hydrocarbon production, which are bolstering government finances and external accounts.

Commenting on the latest S&P report, Jarmo T. Kotilaine, chief economist at the National Commercial Bank, told Arab News: "There is no doubt that the tougher market environment will affect GCC names, both companies that had been planning to tap the capital markets for the first time and ones that are seeking to refinance debt."

He said throughout the crisis, the region as a whole has been sensitive to broader global and regional risks with yields edging up during times of market stress. But beyond this, the performance of individual jurisdictions and names has been increasingly differentiated, with the most leveraged and least resource-rich Dubai and Bahrain generally showing the greatest sensitivity, even if the Dubai World and Nakheel restructuring deals have significantly improved the situation.

"Throughout the crisis, bond and sukuk issuance has been highly volatile. Issuance plans have often been quickly shelved at times of market stress whereas parts of the pipeline have, conversely, been speedily activated in more benign conditions. This sensitivity is clearly potentially a major issue when there are substantial refinancing requirements, not least in Dubai, as well as a massive infrastructure pipeline which would benefit from market-based finance," Kotilaine said.

The demand side is another growing challenge, he added. Especially conventional debt has tended to be sold to foreign banks and institutions. The appetite of banks is showing signs of becoming exhausted. This is partly because of risk considerations, partly due to the need by many Western institutions to focus once again on capital rising.

Sukuk are indeed a potential alternative. The earlier risk premiums on sukuk (vis-a-vis bonds) have been reversed and new, more robust structures developed. The Islamic institutions are generally healthy and even some conventional ones seek diversification opportunities, Kotilaine said.

"Some Gulf issuers have turned to Malaysia to tap the strong and growing Islamic institutional base there, a trend that will likely continue to some extent. What is less clear is the absorption capacity of this segment should the conventional space stall for a more extended period," Kotilaine added.

The head of Europe's seventh-largest bank, Deutsche Bank's Josef Ackermann, said long-term funding was growing hard to obtain. "Short-term financing is fine, but the big question is how we can ensure long-term funding," Ackermann was quoted as saying in a Reuters report.

Financial markets remained volatile on Friday in the face of the widening European debt crisis. Stocks, while avoiding a rout, were lower across much of Europe. Germany's DAX was down 1 percent at 5,792 while the CAC-40 in France fell 0.8 percent to 2,987. The FTSE 100 index of leading British shares was 1.3 percent lower at 5,353, The Associated Press said.

Arab News