Spain set for tricky funding program

Updated 05 January 2013

Spain set for tricky funding program

LONDON: Spain will kick off the most challenging 2013 funding program in the euro zone next Thursday with a debt sale that is raising doubts about Madrid's ability to tackle its crisis without financial help.
The auction will refocus investor attention on Europe after a budget deal in the US took center stage at the start of the year, lifting high-yielding assets.
The US deal averted hefty fiscal tightening that could have thrown the world's largest economy into recession. It has created a favorable global market environment so Spain, seen as one of the riskiest sovereigns in the euro zone, should attract strong demand for its debt on Thursday.
However, its choice to start the new year with a new two-year benchmark signals Madrid is taking a prudent stance and is not yet willing to test the market with a longer-dated bond that would be more sensitive to foreign demand. Two-year bonds are protected by the backstop provided by the
European Central Bank which said last year it stood ready to buy short-dated government bonds if a country asks for a bailout from its euro zone partners.
Analysts say that by taking the most cautious route available, Madrid is signaling a lack of confidence in its ability to avoid a bailout.
Spain said earlier it would sell new 2015 bonds and would reopen its 2018 and 2026 lines next week. Taps of old bonds are of less interest to market participants as they usually come in small size.
The last time Spain issued a 10-year benchmark bond was November 2011.

The fact that it has only issued short-term debt in size since then is a major worry for investors because it leads to a high-risk situation in which Madrid needs to pay back an ever-increasing amount of debt in a short period of time.
With no 2023 bond on the maturity curve, pressure is increasing on Madrid to issue a new 10-year benchmark. If it were to encounter problems attracting demand for such an issue that could be a signal that Spain could no longer continue funding on the market without help.
"In the 2023 (sector) there's zero Spanish issuance. It's quite striking, so obviously the 2023 is a prime candidate for issuance and the market knows that and it will be interesting
what its impact is going to be when it does come," Societe Generale rate strategist Ciaran O'Hagan.
"That's effectively the billion euro question."
While total euro zone issuance will fall by 6 percent this year due to austerity measures, Spanish bond supply will jump by about a quarter to 106 billion euros, according to late 2012 estimates from eight banks.
The sheer amount of supply may be too much for markets to digest, analysts said.
"(Spain asking for a bailout) is still our base case scenario, but we understand that it will not happen unless we have a spike in spreads," ING rate strategist Alessandro Giansanti said.
The other euro zone issuers next week are Italy — which like Spain is expected to benefit from the broadly improved appetite for high-yielding assets — and safe havens Germany, Austria and
the Netherlands.
This week's sell-off in core euro zone debt has lifted yields to levels attractive enough to ensure sales go smoothly, analysts said.

Gulf companies challenged by debt and rising interest rates

Updated 22 April 2018

Gulf companies challenged by debt and rising interest rates

  • Debt restructurings on the rise, but below crisis levels
  • Central Bank of the UAE has raised interest rates four times since last March

There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.


Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”



The number of interest rate rises in the UAE since March 2017.