The use of project bonds is forecast to rise in the GCC, as new Basel III banking regulations threaten to curb local banks’ lending appetite.

According to a new report from US ratings agency Standard & Poor’s (S&P), the types of financing used to support infrastructure projects in the region will diversify.

“We see the implementation of Basel III curbing local banks’ appetite for such exposures, and we expect project bond issuance, which has been limited to date, to gradually increase,” the report says.

Typically, most deals in the GCC are financed with bank credit due to the debt markets being relatively new in the region. Local lenders generally carry the exposures on their balance sheets, rather than selling them down to the secondary market.

Most schemes in the GCC involve highly rated governments and form part of a wider national development strategy. This often ensures the projects are usually seen as strong credits, according to S&P.

Globally, the trend towards increased bond issuance to support project financing has already started. The latest data from UK banking sector tracker Dealogic shows the volume of global project finance grew by 3 per cent in 2013, compared with the previous year, to reach $418bn.

Bond financing totaled $54.7bn in 2013, which is more than double the $25.5bn raised in 2012 and the highest full-year volume on record.

In contrast, loan volume fell by 4 percent year-on-year to $297bn, the lowest full-year volume since 2010.

S&P’s new report estimates that globally, funding needs for infrastructure will reach $3.4 trillion annually. It adds that non-traditional lenders such as institutional investors will take on a greater proportion of the required investment.