Many of the companies rated by Moody’s in the GCC region are well positioned to absorb the effects of rising interest rates, with data showing that 67% are investment grade.
“They have strong balance sheets and have recovered from the impacts of COVID-19, particularly in sectors such as oil and gas, chemicals and real estate,” Moody’s said in an in-depth sector update on Middle Eastern companies.
The rating agency said that while interest rates were rising in general, including in the GCC, rate increases would reduce interest coverage and cash flow, which would reduce companies’ ability to insure and repay their debt.
But, there are key differences between the region and other parts of the world, as GCC companies have compensating factors, including the dominance of investment-grade ratings and strong government support, Moody’s said.
“High oil prices are also good for economies in the region, unlike other countries that face slower economic growth due to higher energy costs,” the update said.
Nearly two-thirds of the debt on the balance sheets of GCC-rated companies bears a fixed interest rate, as many rated companies regularly access global debt capital markets, which are primarily fixed-rate markets, Moody’s said. , adding that many companies entered the market in 2020-21 as liquidity was high following the outbreak of the COVID-19 pandemic.
“Most of the debt raised had interest rates well below current base rates set by central banks in the region. In total, 45% of rated debt is due after 2026, and maturities until then are evenly distributed,” Moody’s said.
The agency said it expects high-quality companies to maintain very strong interest coverage ratios despite rising interest rates.
“Indeed, many of them are very low in debt or have very strong cash generation, especially those operating in the oil and gas or chemical sectors.
“These companies have benefited from higher commodity prices in 2021, which has significantly boosted their cash generation.”
Companies rated in the Ba and B categories will struggle the most due to rising interest rates, Moody’s said.
However, interest rates are expected to be partially offset by improved operational performance as their home economies benefit from higher oil prices, the report added.
(Writing by Imogen Lillywhite; editing by Seban Scaria)