World Economy

(P)GCC Firms Face Higher Debt, Rising Interest Rates

An increasing number of listed companies across the region are restructuring or planning to restructure their capital recently—including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds
DXB Entertainments, the operator of Legoland Dubai, last month announced the restructuring of $1.1 billion worth of debt.DXB Entertainments, the operator of Legoland Dubai, last month announced the restructuring of $1.1 billion worth of debt.

There has been an uptick in recent months in heavily-borrowed companies in the (Persian) Gulf Cooperation Council countries seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.

Speaking exclusively to Arab News, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”

The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signaled that it will raise interest rates at least twice more before the end of the year.

Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.

Nevertheless, just last week, Stanford Marine Group—majority owned by a fund managed by private equity firm Abraaj Group—was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.

The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.

A fund managed by Abraaj owns 51% of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.

Restructuring Debt

Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.

Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.

Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.

Wilde said: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently—including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”

This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.

He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector. On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.

Real Estate Market in Reverse  

However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis. Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.

State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.

Qatar and Saudi Arabia

Qatar raised $12 billion in its first dollar bond sale in two years, surpassing its estranged neighbor Saudi Arabia to issue the biggest dollar bond from an emerging-market nation this year, Bloomberg said.

The world’s biggest liquefied natural gas exporter sold $3 billion of five-year notes, priced to yield 135 basis over similar-maturity US Treasuries, according to two people familiar with the matter, declining to be identified because the information is private. It also placed $3 billion of 10-year bonds at a spread of 170 basis points and $6 billion of 30-year securities at 205 basis points, the people said.

The sale, which eclipsed Saudi Arabia’s $11 billion bond issued earlier this week, received more than $53 billion in bids, including interest from joint lead managers. It was the country’s first public international bond sale since the start of a regional spat in June.

Last week's Saudi deal was its first foray into the international capital markets since last October, when it raised $4.5 billion in 30-year debt; earlier in the year it had raised $ 3billion in five-year money and $5 billion in 10-year money.

Last month, two Saudi Arabian-linked banks have become the first lenders with ties to the kingdom to sign a debt settlement plan with Ahmad Hamad al-Gosaibi and Brothers, the company’s chief executive said, opening the way for the conglomerate to try to push through a multibillion-dollar deal with creditors.

Since AHAB defaulted on about 22 billion riyals ($5.9 billion) of debt in 2009, Saudi banks and those with links to the kingdom have refused to join other creditors in a debt settlement deal, arguing the terms on offer were not satisfactory.

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