A recent raft of green focused fund-raising activity in the Middle East has served to underline the important role that ratings agencies play in how corporates finance their operations in the region. According to Ahmed Hassan, Fitch Ratings’ head of BRM Corporates for the Middle East, the region has witnessed half a dozen green bonds that collectively raised nearly $10bn between February and September 2023.
These included the $5.5bn green bond issued by PIF in February 2023, the second green bond from Saudi Arabia’s sovereign wealth fund aimed at securing funding to finance or refinance its green investments. Its first green bond, launched in October 2022, raised $3bn.
As Fahad Al-Saif, PIF’s head of global capital finance division, said when announcing that the second green bond was six times oversubscribed: “Strong demand from international institutional investors for this second issuance is a testament to the ongoing success of PIF’s capital raising strategy, its credit profile and financial strength.”
Ahmed sees this as an important area for the ratings agencies. “Green financing is a material part of the DCM markets, as demonstrated by the recent issuances,” he says.
The fact that COP28 will be in the region as well gives some focus to this area. Not only can ratings agencies assess which ESG factors have an impact on the credit rating of a company, the reports are also used by investors to help ensure that their own balance sheets continue to meet their green targets.
As such, it can be seen how ratings agencies play a significant role in providing the third-party, independent analysis of the credit profile of companies based in the region that are looking to raise finance.
“Overall growth in the region has been driven by macro and micro events,” says Ahmed. “Everyone is aware of the impact of increasing interest rates, higher inflation and fluctuating oil prices. But locally, the sovereign economic visions of the various states in the region have led to significant infrastructure spend as well.” These visions, or economic plans, typically revolve around the need to switch from an oil-dependent economy to more diversified national income streams. Projects include the development of energy transition, leisure and tourism sectors, as well as technology and infrastructure programmes.
Such projects are funded on the debt side through a mix of international and local liquidity, says Ahmed, though more recently there has been growth on the equity side with the proliferation of the IPO market. “From a debt perspective, the ratings agencies have been more active because of issuers’ need to attract more diverse international pools of liquidity, and on the back of this there has been the need to present a company’s credit story, to deliver on transparency and explain the governance aspects,” he says.
Government-related entities (GREs) were traditionally the focus of obtaining credit ratings, but now the region is seeing the emergence of privately owned companies seeking to raise debt in international capital markets. “Most of the GREs are seeking a rating because of the need for transparency and to present themselves to international investors, but at the same time, we are seeing true corporate names coming to us as well,” Ahmed says.
Ahmed also notes the mix between investment grade entities (those with a BBB- and above rating) and high yield ratings (those from BB+ down to B- ratings). “We are witnessing an increase in lower rated issuers having public ratings and coming to the market. Historically, government-backed investment grade credit constituted the bulk of DCM activity where private sector high yield rated corporates favoured loan markets given preferential pricing terms. However, more recently, high yield rated companies, seeking diverse pools of capital, have shown greater comfort in having public ratings to issue bond/sukuk instruments.”
The region’s drive towards privatisation has been an important part of the growth story, with greater use of project finance encouraging private sector companies to play their part. The transparency provided by ratings can help support this to make it more attractive for investors to participate. The PF market involves long-dated finance, which can have an impact on the capital of local and international banks, so having access to bond markets as an alternative is very important.
However, Ahmed observes there is still a gap between a country’s rating and the private sector companies operating in those countries, which can have a knock-on effect on how debt is priced. Ahmed suggests that such corporates should understand the criteria used by the ratings agencies for their sector and work with advisers with good knowledge of the criteria. “Ultimately, the more transparent a company is, the more attention it will get from investors,” Ahmed says.
Green light for green bonds
Five Holdings (hospitality): $350m bond (Sep 2023)
DP World (ports): $1.5bn green sukuk (Sep 2023)
Masdar (renewable energy): $750m green bond (Jul 2023)
MAF (retail): $500m green bond (Jul 2023)
Taqa (energy): $1bn green bond (Apr 2023)
PIF (sovereign wealth fund): $5.5bn green bond (Feb 2023)
Philip Smith is editor of The Treasurer
