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Tight banks push Saudi firms to other sources

Post-crisis curbs on bank lending have pushed Saudi Arabian companies to turn to the government and boost bond issue as they seek alternative sources to fund their long-development plans, a key Saudi investment firm has said.

But the Riyadh-based Jadwa Investments said the new trend does not usher in a fundamental change in the Gulf kingdom's corporate sector, adding that banks could resume their normal lending once economic conditions improve.

"Access to long-term financing for companies listed on the Saudi stock market has been hit by the greater risk aversion of local commercial banks, but companies have utilised other sources of finance to make up for much of the shortfall. In particular, borrowing from governments and sukuk issuance has risen," Jadwa said in a study sent to Emirates 24|7.

"We conclude this after an examination of the annual financial statements between 2004 and 2009 of all the 143 listed companies. Although this only captures a portion of total corporate borrowing in Saudi Arabia, we think the key findings are valid across the whole private sector."

According to the study, listed firms have historically sourced more than half of their long-term borrowing from local banks.

It said this had changed recently as banks have become more cautious about lending following the eruption of the 2008 global financial crisis and severe default problems in the region, mainly in Saudi Arabia.

"Last year local banks accounted for just 14 per cent of net new long-term lending to listed companies," Jadwa said.

"As a result, government specialised credit agencies in the Kingdom, particularly the Public Investment Fund , have stepped up long-term lending to cover the shortfall in bank finance. Foreign government lending, through export credit agencies, has also become a more important source of financing."

The study said sukuk (Islamic bonds) issuance had also gained pace, adding that it was one of the leading sources of funding for listed companies last year though it is dominated by those with large government ownership.

"But overall corporate borrowing is low. The total debt to equity ratio for listed companies is around a quarter of that in leading global markets," it added.

A breakdown showed the bulk of the borrowing was undertaken by companies in sectors that are engaged in major expansions.

Petrochemicals, telecommunications and energy account for more than 80 per cent of the current outstanding long-term debt of listed companies, it showed.

"We do not think that the recent shift in sources of finance is a structural change. When market conditions improve bank lending will recover and public sector support will ease. However, growth in bank lending will not be as fast as it was in the years up to 2008 and listed companies are likely to continue to diversify their financing base for the time being," Jadwa said.

Its figures showed long-term debt (defined as debt with a maturity of more than one year) of listed companies climbed to SR333 billion (Dh326bn) at the end of the second quarter of 2010, up from SR58.8bn at the end of 2004.

After jumping by 143 per cent in 2007, growth in outstanding long-term debt slowed to 31 per cent in 2008 and to 23 per cent in 2009.

Over the first six months of 2010, total long-term debt edged up by just one per cent (SR3bn), according to Jadwa's figures.

It said the recent decline was due to heightened caution among lenders and tougher economic conditions dampening demand.

"In addition, the bulk of funding for many large projects, notably in the petrochemicals sector, was secured prior to the global financial crisis, so the funding requirement has been smaller in recent years. In absolute terms, the increase in net long-term debt has fallen from SR120 billion in 2007 to SR64bn in 2008 and SR62bn in 2009," the study said.

In response to greater caution among banks, government specialised credit institutions have also boosted lending, with the Public Investment Fund (PIF) one of the main sources of new long-term funding to listed companies in 2009.

The study showed that the PIF increased its long-term lending to listed companies by a staggering 50 per cent last year.

It noted that the PIF tends to provide long-term funding to strategic projects and that it often holds equity stakes in the companies that it finances.

"Sukuk and bonds were one of the largest sources of funding for listed companies last year. However, issuance has been limited to a few companies. Sabic and the Saudi Electricity Company account for 84 per cent of the total outstanding amount and were the source of 73 per cent of new issuance last year. In both cases these are majority government-owned companies and there has been strong demand for their sukuk," the report said.

"The environment is more difficult for those companies without significant government ownership. Only two other listed companies, Saudi Hollandi Bank and Dar Al Arkan issued sukuk last year and in both cases they had to pay much more to borrow than the government-linked firms."

Jadwa said the bulk of long-term borrowing by listed companies is used to finance capital spending. Its figures showed that at the end of the second quarter of 2010, capital expenditure for all listed companies totaled around SR468bn, nearly SR135bn greater than total long-term debt outstanding.

"We doubt that the recent shift is a structural change. Nonetheless, there has been a fundamental change in bank lending practices, which will mean that lending will not grow as fast as it has done in the years prior to 2009," it said.

"Bank lending grew by an average of 27 per cent between 2004 and 2008. Over the coming years, growth will struggle to reach half of that level. Listed companies should be less affected by this than others in the private sector as they are generally more transparent."

By Nadim Kawach

© Emirates 24|7 2010