Gulf states may turn to bonds for infra needs

Project bonds may provide a new source of funding in GCC countries for infra projects, estimated to be worth up to $2trn over the next 20 years, S&P claims.

Project bond transactions in the Gulf Cooperation Council (GCC) countries remain low but this may soon change as bank regulations tighten, ratings agency Standard & Poor’s said in a new report.

The main reasons for the limited project bond activity in the region are “the abundant liquidity in the local bank market and strong relationship lending by commercial banks to petrochemicals- and energy-related projects with perceived strong creditworthiness,” S&P said in its October 30 Ratings Direct report, “How project bonds could plug the potential gap in GCC infrastructure financing”.

However, Saudi Arabia’s central bank has adopted changes in regulations that affect financial services firms. These changes include capital charges for bank lending to projects that were not previously required. S&P expects similar regulations to be adopted by Kuwait and Qatar as well.

“Other regulations such as limitations on exposure by banks to single name, state-owned GREs [government-related entities] have also been discussed in the United Arab Emirates,” according to the report.

Additionally, the implementation of the Basel III framework in Europe may also affect long-term project financing with European financial institutions reducing their long-term lending to the region.

“The implementation of Basel III may in our view encourage a number of the GREs to raise capital through a joint venture project or structured financing, especially if these regulatory changes lead to lower availability of long-term financing from banks,” S&P stated.

The ratings agency noted that Shuweihat 2, a successful issue of $825 million in project bonds in August by Ruwais Power to help refinance a power and water plant in Abu Dhabi, brought back some activity to the project bond market.

“The Shuweihat 2 transaction shows that both bank loans and bonds can be used together in co-financed project transactions,” S&P said.

Industry experts expect infrastructure spending in the region to total $2 trillion over the next 20 years. “This is because of the increasing demands on utility companies; infrastructure expansion associated with rail, ports, and airlines; and events such as the FIFA World Cup in 2022,” according to the report.