DUBAI, Feb 2, (RTRS): Gulf Arab companies and governments, facing over $60 billion of maturing debt to refinance in 2012, will increasingly be forced to move away from relying on traditional funding and embrace “out of the box” thinking in a tough global environment. The six Gulf Cooperation Council states, most flush with cash after a year of high oil prices, are likely to succeed in handling this year’s refinancing challenge without systemic crises. Governments will intervene if needed to avert big, disorderly corporate bond defaults that might destabilise markets. But the process will not always be smooth; unfavourable market conditions, including weak real estate prices in centres such as Dubai, and the uncertain outlook for the global economy mean some debtors will probably resort to restructuring liabilities in talks with creditors.

Other firms may avoid restructuring this year only by turning to options beyond the traditional choices of bank loans and the bond market. Unorthodox financing tools are already becoming more prevalent in the region, such as securitisation and repurchase agreements, in which securities are temporarily transferred for a set period in exchange for capital. “I think that the pressure points will be accommodated. The immediate priority is dealing with the refinancings,” said Stuart Anderson, managing director and regional head for the Middle East at credit rating agency Standard & Poor’s. The need to use unorthodox steps will be more urgent for smaller firms in the private sector, whose financing channels will be tightly restricted, but even large government-related entities may try to wean themselves off bank loans.

Diversity
“Bank lines may be cheaper but diversity is the more rational approach as you preserve credit headroom and improve balance sheet structure,” Anderson said.
While the exact figure is not known, Gulf entities have already restructured or entered talks to restructure tens of billions of dollars of debt since the global financial crisis erupted in 2008, bursting credit and real estate bubbles in the GCC. Many of the restructuring negotiations are not made public.
Roughly $80 billion of loans, conventional bonds and sukuk (Islamic bonds) matured in the GCC last year, according to calculations based on estimates from Thomson Reuters and regional financial firm Markaz. Total maturities are estimated at around $69 billion this year, $45 billion in 2013 and $51 billion in 2014.

So if the region can get through this year without major instability, it has good prospects of coping with the rest of the fallout from the financial crisis.
The task is complicated, however, by the withdrawal from the Gulf of European banks over the past year because of debt problems at home. This is forcing borrowers to re-evaluate funding strategies, since the Europeans previously provided around 50 percent of bank finance in the GCC.
“The interconnectedness of the global banking system makes funding difficult and will undoubtedly have a knock-on effect on regional financing options,” said Ghanem Nuseibeh, founder of Cornerstone Global Associates.
Bank loans into the region fell to $14.9 billion in the second half of 2011 from $26.9 billion in the same period of 2010, according to Thomson Reuters data.

Innovative
“The days of billion-dollar syndications are well and truly gone,” said a banker at a regional bank, who spoke on condition of anonymity. “Banks will have to be innovative and fleet of foot, raising $100-200 million here and there.”
Some banks will look for loans from institutions outside Europe — US and Asian, particularly Chinese, banks are often mentioned. Many will hope to convince banks with which they have longstanding business ties to roll maturities into new loans.
However, “sadly for any debt refinancing, the success or otherwise of such debt roll-overs in 2012 will depend on sentiment emanating from the global sovereign debt crisis,” said Daniel Broby, chief investment officer at London-based asset manager Silk Invest.
One likely result is that borrowers will rely on a reduced number of banks to provide loan funding. This could result in borrowers bumping up against lending limits for individual institutions, according to S&P’s Anderson.

“The question is to what extent can banks in the region, due to the slowdown of the syndication and club loan market, take on more exposure to the larger names? When does this become an issue for banks’ credit concentrations, and will regulators take a closer look at this?” he said.
In a report on Emirates NBD, Moody’s Investors Service noted that as of September 2011, 24 percent of the bank’s loan book was linked to Dubai government-related entities.
“Such high and increasing levels of related-party exposures are a major constraint on our assessment of the bank’s risk positioning,” the agency said in the late January report.
The problem has already been experienced in Saudi Arabia among big construction firms, which have been forced to diversify their funding away from cheap loans from Saudi banks.

Sukuk
Saudi Binladin Group has looked to local investors, printing two short-term sukuk, while Saudi Oger has sought to raise $2 billion from banks outside the kingdom - a process which began in March 2011 and has yet to reach a conclusion.
If borrowers are unable to access private sources of money, governments may have to act.
“You end up with the situation of local banks being stuck at the regulatory limits and if push comes to shove and you need to solve the problems at the government entities, then I see some flexibility to step up,” said a source at an international bank.
In December, Abu Dhabi’s government provided 16.8 billion dirhams ($4.57 billion) of financial aid to Aldar Properties in order to ease the property developer’s cash situation.
This was an important signal of Abu Dhabi’s intentions: it will not permit any default that might damage the debt market for the mass of firms. Elsewhere in the United Arab Emirates, Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Dubai Supreme Fiscal Committee, declared in December that upcoming bonds at the emirate’s state-linked firms would not be restructured, though the government might look into refinancing part of the debts, presumably through issuing new debt.

Governments in the Gulf are financially strong enough to support affiliated firms. A Reuters poll of analysts in December predicted the UAE, for example, would run a budget surplus of 6.0 percent of gross domestic product in 2012 after 8.0 percent last year. The weakest government, Bahrain, could count on additional aid from Saudi Arabia in a pinch, analysts believe. Dubai could probably count on further support from Abu Dhabi.
Markets’ confidence that the Gulf will avoid systemic crises over debt refinancings is not absolute, however. Dubai’s five-year sovereign credit default swaps trade around 420 basis points; while that is well down from highs above 650 bps hit during maximum uncertainty about Dubai’s debt problem in February 2010, it is still far above levels for strong Gulf states such as Saudi Arabia, now around 135 bps.
And government support for companies is not unlimited in range; it is expected to be extended only to entities which are regarded as strategically important. Other companies may have to enter restructuring talks, as half a dozen major Dubai firms have already done.

Abu Dhabi’s government has previously issued a statement saying it considers International Petroleum Investment Co, Mubadala and Tourism Development and Investment Co as strategic companies which it would support if needed. It later added Abu Dhabi National Energy Co (TAQA) to the list.
Dana Gas, based in the emirate of Sharjah, is an example of a company which, the market believes, cannot necessarily count on state support. Uncertainty over the repayment of the balance of a $1 billion sukuk in October 2012 saw prices of its shares and bonds plunge in mid-January, before a statement by the company insisting it will meet its debt obligations halted the selling.
Investment bank Exotix, which has a sell recommendation on the bond, argues that a restructuring or a tender offer to existing shareholders is the likely scenario for Dana. Exotix cites a lack of available cash on the balance sheet and unfavourable conditions for raising new capital.
Tender offers are a liability management tool which may be seen more often in the Gulf, since they have the benefit of extending the maturity profile of debt without the need to raise new capital. With the interest rate environment at historically low levels, the new debt also has the advantage of having a much lower base rate.

Some Gulf entities have already used this tool; in November, TAQA bought back $1.5 billion in bonds using cash raised from a concurrent new bond issue, while Bahrain-based BBK exchanged subordinated debt for new senior notes.
For those looking to issue new debt, a structure which is secured against collateral could provide cost benefits. This could be done as a secured loan, such as the $1 billion, two-tranche deal which Dubai’s Emaar Properties wrapped up in December; it was backed by Dubai Mall, one of the world’s largest shopping centres.
New debt could also be raised through securitisation. Dubai’s Department of Finance did this in 2011, using road toll receipts to raise $800 million. This transaction is expected to be the template for a number of future deals in Dubai, according to a project finance banker.
It is in the area of infrastructure lending that the withdrawal of European banks is likely to be felt most, and this could be the catalyst for the emergence of a long-mooted project bond market in the Middle East.

A couple of Abu Dhabi-based projects have been linked to proposed bond financings, although neither deal made it to market. Dolphin Energy held a series of investor meetings last June but didn’t print a deal because of cost considerations, while Abu Dhabi Water and Electricity Authority was looking to complete a bond as part of the refinancing of Shuweihat 2 — which would have been the first time that a Gulf power project tapped the debt market.
Meanwhile, Middle Eastern companies are well suited to tapping the Islamic bond market; most recent bond issuance from the region has come in the form of sukuk as companies look to circumvent the more volatile conventional debt space.
The latest firm to issue a sukuk, Dubai’s Majid Al Futtaim Holding, printed $400 million this week in an oversubscribed deal. It was the first bond issue by a fully private sector, investment grade name in the UAE in recent memory, and may clear the way for other private sector firms to follow as they compensate for the slowdown in bank lending.