Corporate Governance in the GCC - Euromoney

The region’s bond marketsgather momentumIt is not just the GCC equity markets that have been attracting the attention of a growing corpus ofinternational investors.Entities from the Middle East in general, and from the GCC in particular,have become increasingly active issuers in the international debt capitalmarket in recent years. To date, the bulk of that issuance has been accountedfor by financial institutions. But corporate borrowers have increasinglybeen exploring the potential of the international bond market as a sourcepipeline. In a report published in April, Standard & Poor’s (S&P) noted thatto date it has only rated a handful of non-bank corporates in the region(such as Dubai Holding in the UAE, the Saad Group in Saudi Arabia andKuwait Projects Co in Kuwait). But the report adds that “several others havegone through the ratings process confidentially to benchmark themselves“Although they remain in the early stages of development…the corporatebond markets in the GCC countries have experienced unprecedented growthin recent years and in 2006 in particular, with total issuance at least doublingeach year since 2003”of funding – either through conventional issuance or via the fast-growinginternational market for Shariah-compliant bonds (Sukuk).“Although they remain in the early stages of development…the corporatebond markets in the GCC countries have experienced unprecedentedgrowth in recent years and in 2006 in particular, with total issuance at leastdoubling each year since 2003.” So says Moody’s in a report publishedthis year on the recent evolution of the corporate bond market in theArabian Gulf. Specifically, adds the Moody’s report, total GCC bond issuancereached more than $40bn in 2006, of which corporate borrowersaccounted for just under half, or $18.2bn. “The 2006 total marked a sharpincrease of around two and a half times from the 2005 total of $13.5bn,which featured only a relatively small share of corporate issuance of$3.2bn,” Moody’s notes.The ratings agencies report that more corporate issuance is now in theinternationally and to prepare for capital market entry when the time isright. Access to the international capital markets will be critical for fundingthese entities’ growth intentions and diversifying their investor bases.”Since the publication of the S&P report, the government of Abu Dhabi haslaunched a benchmark bond issue, although the oil-rich Emirate has noneed for borrowed funds. Instead, its debut transaction in the bond marketwas designed as the first stage in compiling a yield curve which will actas a benchmark for corporate borrowers from Abu Dhabi looking to fundthemselves in the international capital market.Initiatives of this kind are very significant for corporate governance in theregion, because companies failing to observe the highest standards ofdisclosure will be unable to meet the requirements of the very demandinginstitutional investors that account for the lion’s share of demand in theinternational bond market. As Moody’s puts it, “in light of their tangiblefunding requirements and their intention of tapping the capital markets tomeet them, issuers need to develop improved standards of transparencyand accountability.”The ratings agencies’ representatives on the ground in the Middle East saythat they have been pleasantly surprised at the willingness of companiesacross the region to accommodate the demands of analysts. “All the countriesI have visited in the region have been very receptive to the ratingsagencies,” says Philipp Lotter, Vice President and Senior Credit Officer atMoody’s Middle East, who has been based in Dubai since early 2007. “Ihave been very struck by how eager they are to promote good corporategovernance and to encourage companies to open their books andbecome more accountable.”