Bashar Al-Natoor, global head of Islamic finance at Fitch, said that the announcement of negotiations to de-escalate the war over the past weekend was reflected in the yield spreads on sukuk and bonds in the region’s markets, which saw a relative decline, explaining that they may rise soon.
He stressed that this decline does not necessarily mean a change in credit risks, explaining that “yield differentials are not a direct reflection of increased credit risks.”
He added that more than 80 percent of the Gulf countries’ ratings are still in the investment grade category, despite some of them being placed under negative watch, stressing that this watch “does not necessarily mean a downgrade, as it may end with either a downgrade or a confirmation.”
He noted that most of the sukuk being evaluated in the region still have stable ratings, indicating that there have been no fundamental changes in credit fundamentals, reports Al-Rai daily.
Al-Natour explained that liquidity movements, yield differentials, and market activity are largely due to market dynamics and investors’ perceptions of risk, where the investor determines the additional return required for the investment, while issuers decide whether they are willing to pay this premium or postpone entering the market.
He explained that with the beginning of the crisis, a large number of issuers refrained from entering the market, especially those with financial flexibility, while others were forced to issue to meet liquidity needs, which led to a decline in activity despite the high yield differentials.
He stressed that this increase in spreads is partly due to increased investor awareness of risks, and not to an actual deterioration in creditworthiness.
Regarding the secondary market, Al-Natour explained that the rebound witnessed by bonds in the region at the beginning of last week, following the announcement of the truce and negotiations, varied according to countries and credit ratings.
He noted that high-yield bonds led this rebound, but stressed the need to put this in context, explaining that this category had previously seen a greater widening of yield spreads, and therefore its improvement does not necessarily reflect a better situation compared to others.
As for liquidity, he confirmed that it declined during the crisis, noting the use of specialized indicators to measure it, such as the Bloomberg index, which measures the time, cost, and potential trading volume of securities.
He added that the market has not yet reached the stage of “complete de-escalation,” explaining that in cases of de-escalation conditions improve, and in cases of escalation the differences widen, noting that the current situation is still between the two.
Al-Natour noted that primary market activity during February and March was almost non-existent, but that issuers began to turn to alternatives such as private placements, reopening existing issues, and arranging deals outside the traditional market.
He explained that this reflects the market moving with different dynamics, where alternative financing channels are being used, instead of traditional debt issuances.
