The COVID-19 pandemic has convulsed the global economy, unevenly weighing on some of the world’s largest emerging markets – not the least of which countries with a heavy dependence on oil revenues. For CFOs and Treasurers based in the GCC region, the pandemic was a crude awakening which quickly led to a liquidity squeeze that is only just starting to ease as a ‘new normal’ begins to set in. Bonds & Loans speaks with Chiradeep Deb, Managing Director and Global Head of Investment Banking, Corporate and Investment Banking Group at Mashreqbank about what that new normal looks like, and how borrowers who need to achieve funding objectives in a tough environment can differentiate themselves in the eyes of lenders and capital allocators.
Bonds & Loans: How has the coronavirus pandemic affected key industries in the UAE and the MENA region more broadly? How has investor sentiment been affected?
Chiradeep Deb: Today, we are living in unprecedented times, treading through completely uncharted territory. Having spent over 20 years in the region, I have noted that although it has been prone to crisis for most of the past decade, none of the past events have been so sudden, deeply, and broadly felt as this. Even through the 2008 global financial crisis, large parts of the region’s economies were functional as long as liquidity was available. But despite liquidity being made available this time around, most asset classes are under severe stress and only a few lines of business have shown early resilience.
The Middle East has historically offered some of the most interesting value picks for global investors as new issuers and borrowers were introduced to the public and loan markets in recent years. The entire region is built on attracting sustainable foreign capital – both human as well as financial. It therefore continues to remain vulnerable to capital flight and abrupt changes in investor sentiment. Petro dollars have the capacity to provide fiscal stimuli, but at the end of the day, the size of these markets can only be sustained by brisk consumption-driven economic activity.
Prior to the pandemic, 2020 was touted to be a good year for institutions across the region with many looking to expand, particularly in UAE and KSA – these have now been dialed back rather quickly; with the exception of investments in technology, growth and capex plans have been deferred for the remainder of 2020 at the very least. As expected, key sectors such as retail, and tourism and hospitality are the most significantly affected. To add to this, SMEs remain the most vulnerable as they have limited cash resources to sustain themselves over the extended pandemic impact period.
Bonds & Loans: What do you anticipate the recovery to look like? What are some of the key signals to look out for in the region?
Chiradeep Deb: It is difficult to predict what the recovery will look like, certainly in the short-term. While I don’t want to paint an extended gloomy scenario, clearly more challenges lie ahead, and which will have to be overcome before most businesses bounce back. The ones that will fare better are those that are relatively asset-light with well-formed, resilient and diversified capital structures. For investors, these are the organisations to focus on. Banks in the region, in most cases, will hold the key to revival as their own liquidity and credit evaluation standards of various business models will govern the level of support that can be extended to enhancing and perhaps reviving businesses. Companies that have a track-record of attracting multiple pools of liquidity will find favour from their lenders.
All GCC countries and most other markets that we operate in will record a significant economic contraction in 2020. Further stimuli will likely be needed during the latter part of the year and in 2021 to bring the economy back into shape.
Bonds & Loans: We’ve seen a jump in sovereign debt issuance from the region in recent months, with most deals witnessing price tightening and oversubscription, a sign of improving risk appetite and sentiment amongst investors. But to what extent is the market open for corporates?
Chiradeep Deb: To put it into perspective, markets were open to BB and single-B issuers from the region ‒ and with strong demand ‒ prior to the onset of the pandemic. As things stand, we expect financial institutions to tap capital markets as a natural follow-on from the sovereigns and, with sovereign spreads compressing and deals seeing oversubscription, we expect investors to eventually search for yield going down the credit spectrum. It will only be a matter of time before corporates start tapping capital markets. In many cases, benchmark rates today are far lower as compared to a year ago.
The need for bonds and sukuk to form a permanent part of the capital structure has never been greater. A strategic cost-benefit analysis of the tradeoffs in accessing bullet funding versus amortising loans is clearly skewed in the favour of the capital markets.
That said, there will be increased focus on governance standards amongst regional borrowers, especially on the corporate side. There has been no new corporate issuer in the market since the NMC fall-out, and it would be interesting to see how investors react to debut or infrequent issuers.
Bonds & Loans: How should corporates be thinking about their capital structure in the current environment? What can CFOs do to proactively ensure greater resilience going forward?
Chiradeep Deb: Governance and transparency is something that corporates across the board will need to focus on in order to diversify their capital sources, especially among the family conglomerates in the region. Businesses are starting to come to terms with the fact that the cost of funding will remain elevated, and they will have to deal with the new normal on pricing benchmarks.
As businesses gradually recover, many will need to shift their existing borrowing profile and reduce reliance on debt to fuel growth. Those who are prepared with a story, backed by a robust business model, will benefit from early attention from lenders and could secure longer term reprofiling of debt against immediate waivers to insure themselves from any subsequent shocks – which cannot be ruled out in the months to come.
If this crisis has taught us anything, it’s that permanency of capital as part of your borrowing mix is a key differentiator and confidence-booster in times of volatility. Corporates that have invested in seeking out various forms of capital across markets and tenors are better equipped and will be the first ones to bounce back. Digitization, a focus on ESG, and sustainability in reporting are some key levers that would differentiate companies as they come out of this crisis. These will eventually lay down the path for a more profitable association between businesses and their capital providers.
Bonds & Loans: Have recent market dynamics created new opportunities in the M&A space?
Chiradeep Deb: The proverbial ‘Cash is King’ has never been more relevant in the M&A space. While investors with deep pockets have been on the lookout for lucrative deals, M&A activity has been rather subdued in these times. We expect M&A activity in the near term to be driven by integration with the same lines of business rather than opportunistic expansion into new sectors. Smaller transactions will account for the bulk of activity, especially for those businesses with limited access to cost-effective capital.
In the GCC, M&A is driven by networks, and as one of the oldest banks with a significant client base across MENA, we are well-placed to connect buyers and sellers. We are already working on a few opportunistic transactions in the mid-tier M&A space, where we are starting to see growing interest.
Bonds & Loans: What are some of the key strategic objectives you hope to achieve at the bank in the near and medium-term?
Chiradeep Deb: At Mashreq, we hope to work with our clients as strategic partners that help them meet their ambitions successfully with tailor-made solutions and ideas, rather than just as providers of capital to help them tide over the current impasse.
Our discussions with clients are anchored in helping them realign their capital structure to avoid financial shocks, and strategizing with them on permanency in their capital structure and ways in which that can be achieved, be it on the debt or equity side; this will always be at the heart of what we do. Our investments a few years ago in developing an industry-driven sectoral approach is expected to put us in good stead to support our clients’ needs in these unprecedented times.