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Mideast faces higher debt costs but won’t default
Over $16 bln bonds due in Mideast, North Africa in 2011; Over $35 billion in syndicated bank loans mature this year; Default risk seen negligible but borrowing costs may rise.
February 23, 2011 4:48 by Reuters
Still, the turmoil has disrupted financing plans. Tunisia had planned a dollar bond in early 2011 while Bahrain had invited banks to bid on arranging a $1 billion issue. The deals will almost certainly be postponed.
However, RBS analyst Raza Agha says there are “no prospects” of a sovereign event in Bahrain.
“In case of financial distress at the sovereign level, several GCC countries would more than willingly provide extensive funding, probably beyond debt servicing requirements,” Agha told clients in a note.
RBS expects $18 billion in issuance from the Gulf this year though much of it is not aimed at refinancing and thus less critical. So far just $1 billion has been placed and borrowers remain shut out of global capital markets.
While no one expects default, higher regional CDS will raise borrowing costs, as investors are paying more to hedge the risk. For instance, bankers estimate that any new bond from Bahrain will now need to carry a premium of 40-50 basis points, versus the 10-20 bps it typically pays.
The costs will be amplified for corporates, which still suffer the reputational damage caused by the 2009 Dubai World debt rescheduling saga.
Two UAE firms, Emaar and Abu Dhabi Commercial Bank kicked off the issuance pipeline this year but both deals came before the Bahrain unrest kicked off.
On syndicated loans, Gulf firms have $15 billion due. That market also has seen some deals postponed, including a $2 billion loan for state-owned Egypt General Petroleum Company.
Ultimately though, attractive pricing will lure buyers.
Sergei Strigo, head of emerging debt at Amundi Asset Management, likes Dubai Holdings debt and notes issuers from Dubai or Qatar are subject to lower levels of political risk.
“Dubai risk is attractive… we get fairly high spreads so the risk is basically priced in,” he said.
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