A more established debt market would offer borrowers, specifically corporates, greater flexibility and a wider range of funding sources. It would also extend the maturity profile of GCC-based corporates in the long-term and help to change the structural high reliance on short-term funding, which generally acts as a constraint on corporate Issuer Default Ratings (IDRs).
“Fitch believes that some of the key obstacles facing the growth of the GCC corporate debt market include the absence of a quasi risk free benchmark yield curve, limited liquidity and market efficiency,” says Sa’ed Katkhuda in Fitch’s Dubai based office. “However, a focused sovereign bond issuance programme and the existence of bond and Sukuk secondary trading platforms, such as those available in Bahrain, Dubai and Saudi Arabia, would likely help ease such obstacles.”
In addition, improved corporate governance standards, as well as the strengthening of investor protection rights, should further enhance investor’s appetite for GCC bonds, which is currently strong, albeit biased toward higher-rated entities.
Fitch notes that record aggregate GCC new bond issuance during 2009 has been accompanied by an increasing awareness by project sponsors, including State-owned entities (SOEs), of the desirability to establish debt markets as another key source of funding, alongside equity and bank loans, to support ongoing and planned projects in the region. Fitch anticipates further corporate issuance will occur in the next 12-18 months.
Debt issuance in the coming years will play a crucial role as a source of GCC project funding, particularly given the major projects currently in the pipeline, elements of which will require financing, combined with strong interest from global investors. Recent sovereign bond issuance by Bahrain, Abu Dhabi and Qatar highlights the active efforts of the region’s government authorities and regulatory bodies to expand the regional debt market.
Historically, debt securities in the GCC as an asset class, particularly in local currency, have remained largely under-utilised. The main reason was due to governments’ large budget surpluses and private sector corporates mainly relying on bank borrowing, both domestically and internationally, to fund their activities along with easy access to equity financing. This has hindered the growth of the region’s debt market. Fitch also believes that many large GCC-based issuers will continue to place their issuance internationally in order to access a wider investor’s base.
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