Open Books For Bonds – GCC Companies Must Bare All

The Middle East bond markets have seen burgeoning volume figures over the last few years.

From $31 billion in 2010 to $42 billion in 2012 and $16 billion as of April this year, it is unsurprising that local companies are increasingly looking to tap the market as a new source of borrowing.

But what they face are procedures previously alien in the ways of doing business in the region, notably the pre-requisite to open up their books and reveal all in public documents.

For local institutions steeped in Arabic culture, particularly those looking to repay debt they have outstanding from the previous boom and bust, the process can be an uncomfortable and unfamiliar one.

“It’s something that people here need to get their head around. Detailed disclosure of the business they’re running – it’s something historically that’s never been done,” says Jacco Keijzer, managing director and head of debt capital markets at RBS, MEA.

“It takes some getting used to and your organisation needs to be ready for that. It’s not a one-off thing either, the rating agencies want on-going checks and confirmations.

“It’s a balancing act, every stock exchange has its own rules. No big secrets will come out into a document, but full description of management needs to.”

Before the 2008 crash, financing in the Middle East was 95 per cent loans. This, in part, explains the alien feeling for local businesses; loans are executed on a private basis whereas bonds are public documents.

So are the UAE’s businesses forthcoming with opening their doors for thorough examination from an external source, a procedure that goes against their culture?

“They’re getting there, a lot of the companies here have some shape or form of the rules and are compliant,” says Keijzer.

“The first one in 2009 was with Dubai Holding and they were transparent. More recently Al Futtaim did one or two trades with full disclosure.”

John Martin St. Valery, founding partner of Links Group of Communications, thinks many Middle East companies should have a positive focus to get their business in order from the start.

“It’s an education process at the moment rather than an application process. Companies are recognising the fact it’s often all about the exit strategy and it’s easier to set up those clear parameters right at the beginning rather than clean it up later,” he said.

“Businesses are encouraged right from the moment they start to disclose and prepare their annual reports, it is something they must do. So we see that from an administrative perspective, it’s happening more and more.

Businesses may ask why it is necessary after years of bank loans without so much scrutiny. They may also wonder if they can spin their books to make the reading more positive than reality would suggest.

“Disclosure generally from a corporate governance perspective is always encouraged,” says St Valery.

“There are tactics in the financial sector which companies might use to conceal how much debt is in their business, but clearly that undermines the market confidence.

“From a market perspective it’s purposely showing the transparency is there through disclosure.”

Middle East bond markets are on course to hit just short of $50 billion this year. If GCC companies want to gain access to that pool of secure funding, they know what they have to do.