GCC investment plans expected to increase project finance and corporate ratings, says report

This is according to a new report released yesterday titled 'Large Investment Plans In The GCC Are Expected To Increase Local Project Finance And Corporate Ratings'.

"The increasing demand for ratings in project finance comes at a time when more than $1 trillion of projects is underway or in the pipeline in the region," said Standard & Poor's credit analyst Jan Willem Plantagie.

"Besides these extraordinary levels of investment that are anticipated, factors that we expect to contribute to an increased demand for both corporate and project debt ratings are the development of secondary capital markets, an increased demand for transparency and benchmarking and attract international investors."

The strong dominance of the oil and petrochemical sectors in the GCC, the requirements to develop civil and transport infrastructure, and the huge plans for real estate development are driving a surge in local construction markets.

The expansion of government-funded airport infrastructure, leisure facilities, housing, and water and electricity infrastructure are similarly driving the huge investments that are currently being undertaken. Much capital is also coming into the region by foreign entities such as the major international oil companies that are keen to be involved with the many developments taking place in the GCC and are seeking reserve replacements from the GCC's vast hydrocarbon reserves.

The GCC's role in supplying global markets with refined products is expected to increase over the next decade with several multi-billion U.S. dollar refining and gas-to-liquid projects. Many of these investments are undertaken on a project finance basis.

The strong competitive nature of these projects, direct or perceived sovereign support, and the tremendous interest from international banks in addition to high local bank market liquidity has made financing projects in the Middle East a very attractive proposal for project sponsors. Pricing is cheap; tenors are getting longer and longer, both in bond and bank finance; and transaction structures are evolving more and more toward corporate structures, making them weaker.

"An important supporting factor for project finance is also the immaculate default track record of projects in the region, with very few publicly known defaults," said Mr. Plantagie. "On the rare occasion that defaults did occur, the recovery was very high, with market participants claiming the recovery rate for projects that defaulted in the region has been 100%."

The information disclosures required during the rating process and, more importantly, the perception of lenders that these entities are essentially sovereign credit risks, have caused some borrowers to shy away from ratings in the past. Nevertheless, companies developing assets in the real estate, leisure, telecommunications, and other sectors are increasingly looking at capital markets to diversify their funding needs and benchmark themselves internationally.

Combined with the need to develop secondary markets and increase the level of transparency, we expect that entities will increasingly look at ratings and become leaders in tapping regional and international capital markets.