Fisch Asset Management says Middle East bond market on same path as Latin America

Fisch Asset Management, one of the world’s leading credit analysis and convertible bond specialists, has said that it expects ratings pressure to grow as leverage increases on GCC corporates and sovereigns. The Zurich-based Asset Manager believes that new issuances will offer diversity and improve liquidity in the region, leading to a broadening of the fixed income investor base. Fisch, whose subsidiary Independent Credit View (I-CV) contains a bench of leading credit experts commissioned by investors, as opposed to issuers, also stated that Corporate Governance in the Middle East would need to improve, particularly in regard to transparency surrounding the use of proceeds. This improved transparency would, in turn, require improved dialogue between issuers and investors. 

Speaking in advance of his live interview at Euromoney’s Saudi Arabia Conference on 4th May, Philipp Good, Head of Portfolio Management at Fisch Asset Management, said: 

“Middle East Countries have the capacity to lever up. The region has the highest average ratings globally, but budget deficits need to be addressed through a combination of investment and reform. The funding of these deficits can be achieved at a sovereign level or among government related entities. Privatization will also play a key role. We think this is an exciting time for the region’s markets. This scenario offers plenty of interesting opportunities for investors, and we intend to actively participate in those. Corporate Governance still has room for improvement, and this will have an impact on pricing power – open dialogue with investors will positively affect credit assessments for issuers.”

A 4th April credit analysis by Fisch Asset Management’s subsidiary, I-CV, rated Emirates Airlines BBB-/Marketweight for the issuance of senior unsecured debt. The report highlighted Emirates’ longstanding track record in successful airline operations as a strength, as well as Dubai’s ideal operational and regulatory environment. Key weaknesses included geopolitical and economic risks, along with oil price erosion. 

Philipp Good continued: 

“The market prices the 4 ½ % Emirates Airlines 2025 issue with a risk premium of 230bp over Treasury. This is in line with BBB Emerging Market Corporate Credits. We currently don’t see much relative value, and therefore are not currently invested.” 

I-CV’s 19th April credit analysis for Saudi Telecom Company (STC) rated the company at A-, highlighting its high and stable margins, free cash flow, pursuit of an expansion strategy in neighbouring countries, and stability provided by state ownership. The report stated that current low oil prices impacting Saudi Arabia’s economy had not impacted STC, but pointed out that such a situation could change rapidly.  The report noted that up to 20% of outstanding receivables could be classified as doubtful debts, which is a significant concern.

In its latest sovereign analysis for the GCC, I-CV rated Kuwait at A. The report points to Kuwait’s abundant natural resources, large oil reserves and high per capita income as important strengths, as well as a relatively robust fiscal situation, a well-endowed Sovereign Wealth Fund and large foreign currency reserves. The report did, however, identify key weakness that have impacted Kuwait’s rating, such as limited economic diversification and dim growth prospects due to the oil price collapse. Oil is responsible for 90% of Kuwait government revenues, and the country operates a generous welfare state largely financed by oil income.  

Richard Banks, Consulting Editor at Euromoney, commented on Fisch Asset Management’s upcoming participation at the Saudi Arabia Conference: 

“We’re delighted to have Fisch Asset Management speaking at this year’s event. In the light of the need for finance by regional sovereigns and corporates, Philipp Good’s expert view on the state of debt securities in global markets will be an important addition to the discussions at Euromoney Saudi Arabia 2016.  We’re also looking forward to his perspectives on debt as an asset class for investors, given the restructuring of the PIF into a US$ 2 trillion sovereign fund.”

In March, Moody’s Investors Service said that lower oil prices would slow growth and increase budget deficits in GCC countries in 2016. Last August, a credit analysis for Dubai’s DP World by Fisch Asset Management’s subsidiary, I-CV, rated the port owner and operator at BBB (Marketweight), noting that despite its efforts to diversify it remained dependent on the UAE’s economic development. The analysis further noted that the UAE’s economic growth was expected to slow, as a result of low oil prices, and that proximity to unstable geopolitical regions in the Middle East presented commercial risk.