The credit-worthiness of companies in the GCC is improving with firms reaping the benefits of relatively high oil prices and the positive effect they have had on government budgets in the region.
The credit profile of non-financial corporates in the Middle East has been further strengthened by their increased focus on refinancing or repaying existing debts.
A new report from ratings agency Moody’s Investor Services on corporate outlooks across the Europe, Africa and the Middle East region (Emea) has judged efforts by GCC firms to reduce their exposure to refinancing risk as “credit-positive”.
Attempts made by debt-laden companies in Dubai to put their balance sheets in order were specifically recognised by Moody’s.
Jebel Ali Free Zone (JAFZ) was upgraded from B2 to B1, with a positive outlook, by the ratings agency in June, after the company repaid its $2bn sukuk issuance. The company also established a refinancing package covering further sukuk facilities.
Dubai Holding Commercial Operations Group was upgraded to B2 by Moody’s in June, with its outlook changed from negative to stable. The decision was made after Dubai Holding made a $500m bond repayment.
However, the GCC region does face a number of risks that threaten its corporate credit quality. Moody’s highlights volatility in oil prices, the rising tensions with Iran and the potential closure of the Straits of Hormuz through which a large proportion of the world’s oil is shipped as risks that could throw GCC corporates off-course.
The retrenchment of European banks and its effect on banking liquidity could also damage the corporate outlook.
Yet, the relative health of GCC companies contrasts with the weakening credit profile of corporates in Europe, particularly those with exposure to southern Europe. Many European corporates, such as Italy’s Fiat and Spain’s Telefónica, remain on a negative outlook.
The eurozone’s sovereign debt crisis and the region’s weak or negative GDP growth will continue to be the biggest drag on the credit profiles of non-financial corporates across the Emea region.
Moody’s predicts that the number of downgrades will continue to exceed upgrades in 2013. It also foresees an increase in the number of companies downgraded from investment grade.