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Some Gulf corporates could feel the heat on low oil prices, says S&P report

UAE. Standard & Poor’s Ratings Services said today that although it expects that some corporates and infrastructure issuers in the Gulf Cooperation Council (GCC) will likely feel the weight of lower oil prices, most of its rated entities show resilient financials for now, in an industry report card published today titled, “Some Gulf Corporates Could Feel The Heat On Low Oil Prices.”
 
Corporate and infrastructure companies in the GCC face a weaker operating environment at present on the back of lower oil prices. Prices of oil have more than halved since June 2014, thereby slowing government expenditures, on which these companies largely depend.
 
The drop in oil and gas prices triggered a 58% reduction in corporate and infrastructure bond and sukuk issuances over the 12 months ended Aug. 31, 2015, compared with the previous 12 months.

This declining issuance was partly because of the tightening of budgets at key government-related entities (GREs) that carry out important roles in infrastructure projects on behalf of their respective governments. In some cases, limited government budgets prompted the cancellation of infrastructure projects. With regard to entities exposed to the oil and gas industry, a sharp reduction in capital expenditures is also leading to lower issuance.
 
“We observe, however, that GCC governments continue to invest in large public sector infrastructure projects. Still, the longer the oil price remains near current low levels, the higher the likelihood of seeing more infrastructure projects postponed or dropped,” said Standard & Poor’s credit analyst Karim Nassif.
 
We nevertheless see various factors that could propel existing and new issuers to tap the capital markets over the coming year. These include the gradually declining availability of liquidity at the local banks, the opening up of markets to foreign investment (such as the Tadawul in Saudi Arabia, along with the Iranian market following the nuclear deal with the P5+1), and the refinancing by GREs in 2016.
 
Ratings on some companies with exposure to commodity markets have come under pressure due to the lower oil prices. Similarly, ratings have been constrained on key GREs with ratings connected to sovereigns. This year we have lowered the ratings on Bahrain and on Oman. The sovereign ratings on Bahrain and Saudi Arabia remain on negative outlook.
 
The Dubai real estate market is also suffering, with residential prices expected to decline by about 10%-20% during 2015. However, we think our ratings on property developers and property investment companies in the United Arab Emirates (UAE) are cushioned enough to withstand the current correction.
 
Despite our expectation of a tougher pricing environment ahead, we believe a potential U.S. Federal Reserve’s interest rate hike, even if it were to lead to a 150 bps-200 bps increase for Gulf corporates (based on our stress assumption), would not rock the creditworthiness of the entities we rate in the short term.
 
Energy subsidy cuts by Bahrain, Oman, and the UAE governments could increase financial pressures on downstream corporates in the region. Governments are currently protecting large public sector investment budgets to support economic growth. Yet, the longer the oil price remains at current lows, the more likely these could be postponed or cut.

Photo Caption: Standard & Poor’s credit analyst Karim Nassif

About Standard & Poor’s Ratings Services
Standard & Poor’s Ratings Services, a part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. We have approximately 1.2 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities.

With nearly 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

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