Euro crisis to worsen $25bn Gulf debt burden

Euro Zone: Rockiness in global capital markets is likely to push up refinancing risks for the Gulf as $25 billion in debt comes due in 2014.

Dolphin Energy, a gas production and pipeline company based in Abu Dhabi, is among the companies that have delayed bond issues until market conditions improve. Jaime Puebla / The National

European bond and stock markets suffered a further fall yesterday as Gulf companies were warned they faced growing refinancing risks linked to US$25 billion (Dh91.8bn) in debt due next year.

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Yields on euro-zone sovereign debt widened further, reflecting investors' concern that the European crisis may spread.

Spanish bond yields reached 6.98 per cent, their highest level since 1997, at a 10-year auction. A French bond auction also reported elevated yields while stock markets declined across Europe.

In the Gulf, financing challenges are likely to be compounded by capital market rockiness, Standard & Poor's Ratings Services said in a research note yesterday.

"Standard & Poor's believes the region is therefore entering a challenging loan and bond refinancing cycle, especially given the ongoing volatility in capital markets and fears that slowing global economic growth is already curbing corporate debt issuance and heightening refinance risk in the region," the ratings agency said.

Bonds and sukuk of about $25bn in the region will mature next year, rising to about $35bn in 2014, S&P said.

Mirroring sluggish capital market activity globally, regional firms have been hesitant to issue bonds this year. A logjam that formed as a result of the Arab Spring has been worsened by the uncertainty sparked by the European sovereign debt crisis.

Dolphin Energy, a gas production and pipeline company based in Abu Dhabi, is among the companies that have delayed bond issues until market conditions improve.

The lack of action by companies with funding needs could "accentuate refinancing risks" for these players, S&P said. Instead, most are turning to banks to meet their financing needs.

However, many banks remain reluctant to lend as they concentrate on cleansing their balance sheets of bad assets after the global financial crisis.

"The UAE's banks are better prepared to face the fallout of the euro-zone debt crisis than during the financial crisis of 2008," wrote Capital Economics in a research note released yesterday.

"However, lending to the private sector is unlikely to return to healthy levels until 2013 at the earliest." As a result, UAE GDP growth is likely to trail that of other GCC states, notably Saudi Arabia and Qatar, it said.

Credit growth is expected to be largely generated by Abu Dhabi banks. Borrowing by the banking system has fallen over the past few years and the refinancing needs of local banks is largely manageable, S&P said.

Waning appetite for conventional bonds is encouraging some issuers to turn to the Islamic debt market, which has seen a sharp increase in activity this year. Abu Dhabi Commercial Bank has sold $500 million of five-year dollar-denominated Islamic bonds, Bloomberg News reported .

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