'As central banks hike interest rates, along with the US Federal Reserve, and with significant political uncertainty hanging over the region, issuers are keen to lock in long-term funding at still attractive rates. Single-exposure limits on banks are also forcing some GCC issuers to diversify funding sources,' S&P Global Ratings credit analyst Tommy Trask said in a report published on Wednesday.
S&P also sees an emerging trend in budget-constrained governments increasingly looking to their government-related entities (GREs) to tap capital markets for corporate and project bonds to complement record sovereign debt issuance.
Two recent examples are Abu Dhabi Crude Oil Pipeline LLC (ADCOP) issuing US$3bn of project bonds and Nogaholding issuing US$1bn of bonds. 'With government budget deficits remaining substantial, we expect this trend to continue into 2018,' S&P said.
It said the GCC corporate and infrastructure capital market activity is set to more than double from 2016 as rising oil prices in recent weeks offer a glimmer of hope for GCC corporates.
S&P said higher oil prices in recent weeks, boosted by rising global demand and expectations that OPEC and other producing countries will extend a deal to cut production, offers a glimmer of hope for GCC corporates that have endured tough operating conditions for the past three years.
It said bond and sukuk yields are up about 50 basis points year on year, partly in response to increasing political tensions in the region, but not to the extent that the higher borrowing costs have material ratings implications.
Sukuk yields have risen more than those for bonds, and corporate sukuk issuance volumes fell dramatically in the second half of 2017 versus the first half.
This follows the refusal by Dana Gas PJSC to honor its sukuk obligations on the basis of non-compliance with Sharia'a. 'It remains unclear what ramifications this will have for future corporate sukuk issuance and whether the market will write this off as an idiosyncratic event linked to a specific issuer or something with wider ramifications for the asset class,' the report said.
S&P sees political risk, energy subsidies, and tax reform across the GCC as some of key risks to the region's corporate ratings. 'The most unpredictable and significant risk factor is political risk, most notably the increasing tensions between Saudi Arabia and Iran playing out in Bahrain, Iraq, Lebanon, Qatar, Syria, and Yemen, charges of corruption against ministers and leading business figures in Saudi Arabia, and the ongoing trade embargo of Qatar,' Trask said.