Record year for rights issues in the Gulf

The value of rights issues by Gulf based companies has jumped to a record $15.76 billion over the last year, a 242% increase on the previous year, reveals research by international law firm Trowers & Hamlins. In the last six months alone rights issues in the GCC* raised $11.9 billion from shareholders.
 
Unlike in the UK, where companies are using rights issues to repair balance sheets damaged by the credit crunch, rights issues by GCC based companies are mostly being used to fund regional and international expansion.
 
This year’s record figure is a rapid recovery from the $4.6billion raised through rights issues in the previous year when a fall in the region’s stock markets undermined plans for wider capital raising through secondary share issues.
 
Trowers & Hamlins says that companies have been quick to take of advantage of the subsequent rally in the regions’ stock markets which had bought with it the chance to issue new shares at higher valuations and a renewed appetite amongst investors for shares.
 
The increased equity issuance comes on top of record bond issuance by Gulf based companies in the last year of $17billion of corporate sukuk (Islamic bonds) and $11.2billion of conventional corporate bonds (source: Trowers & Hamlins).
 
Comments Andrew Rae, Partner, of Trowers & Hamlins: “The Gulf stock markets and the companies listed on them are maturing rapidly.  The oil led boom has provided a tremendous boost to the profitability of Gulf companies and their strategies for expansion.”
 
“Ten years ago Gulf companies largely restricted their ambitions to their local markets but now they have become increasingly sophisticated and ambitious. They are looking at regional and international growth opportunities but still need to raise additional capital to fund that expansion.”
 
Andrew Rae says that Al Rhaji Bank, Saudi Telecom, SABIC and Etisalat are now part of the FT Global 500 (world’s largest companies by market capitalisation) and that other Gulf based companies, particularly in real estate and telecoms, are committed to competing on an international basis.
 
47% of all Gulf rights issues over the last year were issued by banks and financial services companies. Although a small portion of that money has been used to repair limited damage created by the collapse in market values of US subprime investments the majority is being used by banks to take advantage of new lending opportunities within the growing Gulf economy.
 
Neale Downes, Partner, of Trowers & Hamlins, explains that banks may also be expanding their balance sheets to take of advantage of M&A opportunities that exist within the Gulf banking sector. Last year saw the creation of Emirates NBD Bank, from the merger of Emirates Bank International with the National Bank of Dubai, creating the Gulf’s largest lender by assets.
 
Comments Neale Downes: “The market is expecting to see more consolidation in the banking sector and if banks want to be the acquirer rather than the acquired they may well look to rights issues as quick way of beefing up their balance sheet.”
 
Neale Downes also says that banks are looking to expand their balance sheets as they broaden their adoption of Basel II. Under Basel II a broader diversification of risks should allow a bank to keep lower reserves. However, achieving this diversification is not easy without increasing the scale of a bank’s operations.