GCC corporate bonds market set for takeoff, says Fitch

Flurry of recent, high-value bond issues could combine with regulatory shifts to create a viable corporate debt market, says ratings agency

Recent bond issues in key territories of the Middle East could kindle a thriving market for corporate bonds throughout the Gulf Cooperation Council (GCC), Fitch has said.

In a 1 November opinion, the ratings agency cited high dollar-value issues that have taken place in Abu Dhabi ($5bn), Qatar ($9bn) and particularly Saudi Arabia ($17.5bn).

Such measures, it noted, could reverse the region’s lack of a sovereign yield curve, paving the way for corporate issuance to gradually take off in 2017.

“Given the shift in oil prices,” Fitch said, “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.

“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.”

Robust liquidity and a strong lending appetite among the region’s banks have contributed to the relatively slow development of local corporate bond issuance, the agency said.

“Bank financing has been easier, quicker and cheaper than tapping capital markets,” it pointed out, “especially given the lack of a track record of issuance”.

Now, 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.

“Even when corporates can borrow from banks, the pricing difference between the bond and bank markets may narrow.”

In Fitch’s view, new regulatory regimes will also help towards standardising bond issuance – which ought to speed up the process and cut costs.

“The Saudi Capital Market Authority’s reform of the corporate debt market has included measures to make regulatory approval of debt products easier,” it said.

“Kuwait’s Capital Markets Authority announced a broad sukuk framework in November 2015 and Oman updated its sukuk regulation.”

Furthermore, it noted, the United Arab Emirates’ central bank has proposed the creation of a Higher Sharia Authority to provide unified supervision and guidance on Islamic finance-related matters.

“The biggest remaining roadblocks to corporate issuance,” Fitch stressed, “are therefore 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,” it added, “and are likely to drive a gradual increase in corporate issuance next year.”

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