The extent of the Middle East’s liquidity crunch is coming into focus, as bond redemptions pile up, with little sign of an improvement in primary-market conditions. HSBC has calculated that $94 billion of foreign currency bonds and syndicated loans in the GCC states will mature in the remainder of 2016 and 2017.
The number – made up of $52 billion in bonds and $42 billion in syndicated loans – is big in any market, but becomes more problematic because of an alignment of circumstances. The low oil price has increased the need for funding at exactly the time that investor demand to supply it has dried up.
Secondly, it is apparent that the GCC states, wrestling with deficits for the first time in years, intend to do some of the financing of those deficits through the bond markets, taking up investor appetite that might otherwise be called upon for those redemptions.
According to HSBC chief economist for CEEMEA Simon Williams, the GCC oil producers have an aggregate fiscal deficit of $260 billion between 2016 and 2017, and a $135 billion current account deficit, equivalent to 8.7% and 4.5% of GDP, respectively.
Simon Williams, HSBC
“We remain confident that these funding gaps will be covered,” Williams says.
“However, expectations that they will be part financed through the sale of sovereign US dollar debt, in some cases for the first time, will complicate efforts to refinance existing paper that matures over 2016 and 2017.”
Williams adds: “With the Gulf acting as a single credit market, the refinancing challenge will likely be much more broadly felt” than just in the Gulf sovereigns that dominate outstanding issuance, chiefly the UAE, “with its impact compounded by tightening regional liquidity, rising rates and recent downgrades by international rating agencies.”
These downgrades are already having a demonstrable impact on the funding environment. In February, the Kingdom of Bahrain set out to raise $750 million in a dual tranche bond issue through Bank ABC, BNP Paribas, Citi, HSBC and JPMorgan. Then, while the deal was under way, Standard & Poor’s downgraded Bahrain from BBB- to BB, one of many downgrades from the agency, but in this case taking the borrower from investment grade to junk.
A week later, emboldened by a reverse inquiry, Bahrain came back again and succeeded in raising the funds it originally wanted – albeit about 25 basis points wider than it had originally expected.
The Bahrain experience shows how sovereign debt metrics in the Gulf are declining, as reflected in the downgrade, while issuers might not have the luxury of simply packing up and going home if funds turn out to be more expensive than they wanted.
The question, though, is how many more issuers can get deals away before that appetite is exhausted. Saudi Arabia and Oman, now rated A- and BBB- respectively after downgrades from S&P, might be the next sovereign borrowers to come, and scarcity value is sure to help those deals get through, if they are willing to pay the necessary price. But crucially, almost half of the outstanding debt maturing in the next two years is from banks, and they may have a harder time accessing funds than sovereigns.
“GCC financials issuers will feel the pain the most,” says Andy Cairns, global head of debt origination and distribution at National Bank of Abu Dhabi. “They represent 70% of historical issuance from the region, and are the biggest investors in that same paper. That high correlation doesn’t work in the current liquidity environment.”
Some deals are still getting done beyond the sovereign. In March, Kipco, the Kuwait Projects Company, became the first Middle East corporate issuer of the year when it raised $500 million in seven-year funds. It paid 5% – the tight end of initial guidance from leads BNP Paribas, Citi, HSBC and JPMorgan of 5% to 5.25%, not bad for a Baa3/BBB- rated company in a country that has been downgraded by S&P and is on review for downgrade by Moody’s. (Its status as an investment holding company partly owned by the Kuwaiti royal family may, however, make it more attractive as a credit.)
“Current technical dynamics are supportive,” says Cairns. “GCC 2015 issuance volumes were the lowest since 2007, we’ve had de minimis issuance year to date and investors are alert to the $17 billion of GCC maturities this year.” Will it last? “Looking forward, there is likely $20 billion of new supply from GCC sovereigns in 2016 and significant refinancing needs across bonds and loans,” he says. “I see pricing this year being one-directional, and there is scope for a crowding-out effect as more borrowers come to market.”