The region’s credit cracks are widening

Many of the region’s USD-denominated sukuk and bond yields blew out to five-year-high spreads since the outbreak of the Iran war, but remain below pandemic levels, according to a Fitch Ratings note. Total GCC bond spreads widened by 42 bps on a YTD basis, with corporate spreads (+67 bps) bearing the brunt of the increase, Emirates NBD said in a separate note (pdf).

Pricing pressure froze the primary market, pushing activity towards alternative funding channels: With GCC bonds shedding 2.4% YTD (compared to a 1.6% dip in the broader EM complex), issuance slowed to just USD 1.7 bn in March, down more than two-thirds y-o-y and sharply below the USD 10 bn raised in February. Borrowers are now moving more towards bank-led lifelines such as syndicated loans and CDs, with GCC syndicated loans rising 12% y-o-y to USD 450.5 bn.

REFRESHER- The pressure first started to show among Dubai property players when six USD bonds issued by Binghatti and Omniyat tipped into distressed territory last week. Spreads on Sobha and Arada paper also blew out sharply, suggesting that Dubai’s more cyclical credit story remains the market’s clearest pressure point.

There’s still a buffer — and some who are swimming against the tide: The region’s sukuk continues to trade tighter than conventional bonds, reflecting steady support from Islamic-bank liquidity, Fitch says. Sukuk mostly steadied last week and sovereign bonds also remained largely steady, even as broader regional markets came under pressure. Meanwhile, Emirates NBD just raised USD 2.25 bn through a syndicated loan and Murabaha facility, securing commitments from 15 banks with its tightest pricing on record for one of the GCC’s largest syndicated borrowings to date, it said in a press release.