Corporate borrowers in the Gulf with more than US$59 billion (Dh216.5bn) of repayments due this year are facing a new credit squeeze as financing costs surge and euro-zone sovereign-debt woes threaten to infect regional bond markets.
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A logjam of delayed bond sales that began during the unrest this year in the Middle East and North Africa is becoming longer as companies find themselves effectively closed out of credit markets.
Dubai has about $30bn of debt repayments coming due this year and next as it seeks to make good on agreements with creditors of government-linked holding companies. The repayments come at a time when investors are shying away from what they see as risky investments and are demanding greater returns to buy the debt of some regional companies. Future repayments could be hampered by euro-zone turmoil, said Rachel Ziemba, a senior research analyst at Roubini Global Economics.
"The deterioration of the global environment will make it even more difficult for Dubai to refinance its debt, and possibly raise financing costs even for Abu Dhabi debt," she said.
Warning signs have started to emerge among some companies that have already won a reprieve from creditors. Yields on sukuk issued by Nakheel, the developer of Dubai's man-made islands, rose sharply last week as contractors who had agreed to be paid in paper rather than cash rushed to sell the Islamic bonds. Their yields were approaching 20 per cent on Thursday, traders said. Bond yields increase when prices fall.
A total of $59.2bn of loans, bonds and sukuk from Gulf companies will mature before the end of this year, and a further $95bn next year, according to data from Bloomberg News. Some companies have already returned to creditors to seek new deals on restructured debts. On September 15, Global Investment House, a Kuwaiti investment company, sought approval to renegotiate the terms of its 2009 restructuring.
For Gulf companies anticipating bond repayments, credit market troubles emanating from Europe are a big concern, said Mark Watts, the head of fixed income at National Bank of Abu Dhabi. "A lot of borrowers are in want, rather than in need," he said.
But he added that that outlook could change "when you start to get into 2012, if there are people out there who really need to refinance and markets are still closed".
For Dubai, credit default swaps, which reflect the cost of insuring its debts against default, have risen 102 basis points to 435.46 since markets started to convulse last month.
Better economic sentiment earlier this year helped Dubai to sell $500 million of new bonds in June and many companies had secured favourable terms from creditors seeking to roll over their debt maturities, according to a report from BofA Merrill Lynch Global Research.
"Dubai made enough headway to limit exposure to rollover risk in the near-term in our view," the report said. "Excluding ongoing restructurings, the schedule for the rest of 2011 looks clear."
But the outlook changes for the worse if market turmoil persists, the report said.
"Dubai may have a window of 6-9 months before the most problematic refinancings in our view: the DIFC Investments US$1.25bn bond in June 2012 and the Jebel Ali Free Zone Authority US$2bn bond in November 2012," the report said.
International lenders, which have been largely supportive of restructurings among large Dubai companies, "may revise their approach to regional restructurings if engulfed in a global crisis", the report said.
Plans for asset sales by a number of Dubai Government-related holding companies as part of restructurings were potentially at risk from upheaval in developed markets, said Zafar Nazim, a credit analyst at JPMorgan.
"Dubai Group and Dubai World asset sales in particular can get impacted by the current state of the market," he said. "These companies have significant number of assets to sell, quite a few of which are in developed markets."
DIFC Investments, the investment holding arm of Dubai's financial free zone, is also expected to require additional financing as a result of falling asset values, said Tommy Trask, a credit analyst at the ratings agency Standard & Poor's.
"Our base case assumes it will meet debt refinancing needs in 2012 from a combination of asset sales, new debt and existing cash balances," he said. "Our original assumption was that this would be met from assets sales and existing cash balances alone, so the need to raise new debt is a change from a year ago."
Mohammed Al Shaibani, the director general of Dubai Ruler's Court told Bloomberg News last week he did not expect refinancing problems with the emirate's strategic investments and ruled out any asset fire sales.
Other commentators agree that Dubai is back on an even keel despite the deteriorating outlook for the global economy.
"I do not see another wave of defaults or deferred payments other than what has already been worked out," said the influential investor Mark Mobius, who oversees about $50bn of investments as the executive director at Templeton Emerging Markets Group. "There will be no choice for the banks but to accede to the requests for renegotiations. Revenues for those companies will continue to come from real estate sales and rentals. The key will be the degree to which the governments in the region loosen up restrictions on immigration," said Mr Mobius in a written response to questions sent by The National.
But a wave of bond maturities due in the next few years in Europe and the US, the result of leveraged buyouts made during the boom years, could also complicate access to funding for Gulf companies, said Eric Benedict, a partner at Alix Partners.
"Bond issuances will not be easy in Europe or the US, nor will be sources of financing from banks - contributing to a pincer effect which may make refinancing and new financing very difficult," he said. "It's a trend that we might well see have an impact over here in the Middle East."
* additional reporting by Hadeel Al Sayegh
tarnold@thenational.ae
