$31.5bn bond issuance 'to support Gulf's capital market growth'

Fitch says Saudi Arabia, Abu Dhabi and Qatar's recent bond issues create a pricing benchmark for the future
$31.5bn bond issuance 'to support Gulf's capital market growth'
By Staff writer
Tue 01 Nov 2016 04:49 PM

Saudi Arabia, Abu Dhabi and Qatar's international bond issues totalling $31.5 billion create a pricing benchmark that will support the broader growth of capital markets in the region, according to Fitch Ratings.

The agency said in a research noted that the lack of a sovereign yield curve has been one of several factors holding back corporate bond issuance in the region.

But Fitch said these dynamics are starting to change, and corporate issuance should gradually start to take off in 2017.

"Given the shift in oil prices and our expectation that they will only recover to around $65 a barrel in the long-term, we believe sovereign issuance from GCC members will become a more regular feature of these markets," the agency noted.

"This is critical because the yield on sovereign debt creates a pricing benchmark from which all other debt instruments in the same market can be priced," it added.

 

Robust liquidity and strong lending appetite at the region's banks also has been a factor in the slow development of local corporate bond issuance, Fitch said, adding that bank financing has been easier, quicker and cheaper than tapping capital markets, especially given the lack of a track record of issuance.

However, lower oil prices have reduced banks' liquidity and therefore their ability and willingness to lend. This may create a large funding gap for corporates, Fitch said.

New regulatory regimes will also help standardise bond issuance, which should help speed up the process and reduce costs, the Fitch statement added.

Fitch said the biggest remaining roadblocks to corporate issuance are likely to be the development of debt management expertise and a change in the corporate culture to increase financial and management transparency.

"The region's biggest corporates should be able to adjust relatively quickly and are likely to drive a gradual increase in corporate issuance next year," the agency said.

It added: "We believe GCC corporates are more likely to issue sukuk than bonds (or a mixture of both rather than only bonds) in order to attract a wider local and regional investor base including Islamic investors."

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