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GCC firms' solid balance sheets ingest higher interest rates – Moody's

GCC firms' solid balance sheets ingest higher interest rates – Moody's
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Mubasher: Several companies in the GCC region have a strong position to absorb interest-rate hikes which lower businesses' ability to repay debts, Moody's Investors Service stated in a recent report.

Moody's predicted that investment-grade companies in the GCC will continue to have powerful interest coverage ratios despite the surging interest rates. This is because many of these firms have little debt or own robust cash flow generation, especially those operating in the oil and gas or the chemicals sectors.

The rating agency noted that these companies benefited from the hike in commodity prices during 2021, as it reinforced their cash flow. Meanwhile, firms with ‘Ba’ and ‘B’ ratings will struggle the most due to higher interest rates.

However, Moody's expected the leap in interest rates to be partially amortised by a strong operating performance as their local economies benefit from higher oil prices.

About two-thirds of the debt on rated GCC businesses' balance sheets have a fixed interest rate. This comes after many enterprises entered global debt capital markets in 2020 and 2021 when liquidity was high after the COVID-19 pandemic.

Most of the raised debt held lower interest rates than the current base rates set by central banks in the region. Overall, 45% of rated debt is due after 2026, whereas maturities until that period are equally disbursed.

Julien Haddad, VP-Senior Analyst at Moody's, said: "The predominance of investment-grade companies and strong support from governments are the main reasons for this resilience."

Haddad added: "High oil prices are also beneficial for the economies in the region, in contrast to other countries that face slower economic growth because of higher energy costs."

Last September, Moody's data showed that asset managers in the Gulf region projected that higher oil prices would back their assets under management (AUM) and attract higher fund inflows.