Things are looking up for debt markets in the Middle East. In June, the World Bank raised 2021 economic growth forecasts for the Middle East and North Africa to 2.4%, up from 2.1% in January, as vaccination programs in the Gulf states saw economies reopen and recovering oil prices lift exports.

This stabilizing macro-economic picture has given borrowers and lenders the confidence to return to market after a volatile 2020. Issuance of high yield and investment grade bonds and leveraged and non-leveraged loans across the Middle East and Turkey totaled US$152 billion in H1 2021. This was up slightly from the same period last year, when figures reached US$150.9 billion—skewed by a spike in Q2 2020 activity as issuers raced to shore up balance sheets amid accelerating COVID-19 disruption—and a clear improvement on the US$106.6 billion of issuance recorded in H2 2020.

Encouraged by the improving market backdrop, issuers saw a window to raise large sums of capital at attractive rates. Qatar Petroleum, for example, raised four bond tranches in June 2021 worth a combined US$12.5 billion, with coupons ranging from 1.375% to no more than 3.3%.

General corporate issuance of US$100.7 billion in the Middle East and Turkey accounted for the bulk of proceeds in H1 2021, but borrowers in the region also took advantage of favorable market conditions to refinance existing debt, with refinancing issuance of US$18.7 billion representing approximately 12% of bond and loan activity.

When refinancing, borrowers have been able to push out debt maturities and lock in lower pricing. The Abu Dhabi National Energy Company raised two US$750 million senior unsecured bonds in April 2021, maturing in 2028 and 2051, with coupons of 2% and 3.4%, respectively. The proceeds will be used to refinance a series of existing bonds priced in the 3.625% and 5.875% range and maturing between 2021 and 2023.

M&A and restructuring add to momentum

In addition to robust refinancing and general proceeds activity, a reviving M&A market and rise in restructuring activity also contributed to the steady issuance recorded this year.

M&A deal value in the Middle East climbed from US$32.1 billion in H2 2020 to US$57.6 billion in H1 2021. Middle East deal figures were boosted by a series of mega deals across a range of sectors. The US$2.2 billion merger between Qatari banks Masraf Al Rayan and Al Khalij Commercial Bank in January 2021 and the Saudi Arabian oil group Saudi Aramco’s US$12.4 billion divestment of a 49% stake in its pipelines business to US-based EIG Global Energy Partners in June 2021 are among the jumbo transactions so far this year.

Rising deal activity boosted debt issuance for deals in the region. Issuance intended for M&A and buyouts in the Middle East and Turkey from high yield and investment grade bonds and leveraged and non-leveraged loans surged in the past 12 months, from just US$110 million in Q1 2021 to US$11.7 billion the following quarter. Issuance for M&A and buyouts for H1 2021 is up more than four-fold from the US$2.9 billion posted in H2 2020.

M&A is expected to provide a fertile pipeline of debt financing opportunities through the rest of 2021 and into 2022. For example, according to Debtwire Par, the Saudi Telecom Company is in talks with domestic lenders for a US$1.3 billion-equivalent loan to back the purchase of a 55% stake in Vodafone Egypt.

Restructuring issuance, meanwhile, saw an uptick of activity in the Middle East and Turkey—a rare occurrence in the region. After posting US$560 million of volume in Q2 2020, restructuring issuance jumped to US$2.8 billion in the final quarter of 2020, with momentum carrying into the first quarter of 2021, when issuance totaled US$1.7 billion.

The restructuring of United Arab Emirates (UAE) hospital group NMC in June 2021—the largest private healthcare provider in the UAE—which disclosed a US$4 billion hidden debt that led to an administration and asset sale, underpinned the uplift in restructuring activity. More restructuring situations are anticipated as government financial support unwinds and better visibility on future business earnings gives lenders and borrowers a clearer picture of value breaks in capital structures.

ESG attracts interest

As has been the case globally, debt activity in the Middle East also saw growing appetite from investors for green, sustainability and environmental, social and governance (ESG)-linked loans.

Middle East borrowers noted the rise in demand from investors for ESG-linked investments, as well as government initiatives to diversify economies away from hydrocarbons and to improve reporting on sustainability. Green and sustainability-linked debt issuance in the Middle East and North Africa reportedly reached US$6.4 billion in the first half of 2021, surpassing the full-year total for 2020.

In March, one of the region’s largest banks, Emirates NBD, issued the Middle East’s first sustainability-linked loan. The bank raised US$1.75 billion for the facility, which will see pricing linked to gender diversity and water conservation metrics.

In Saudi Arabia, meanwhile, the Red Sea Development Company, which is overseeing the development of a landmark, high-end tourism project, secured a 14.12 billion riyal (US$3.77 billion) green loan, believed to be the first such loan facility to be denominated in local currency. Further green and ESG-linked debt issuance is expected through the rest of the year.

The growth of the ESG debt space in the Middle East, coupled with the improving outlook for mainstream loan and bond issuance, bodes well for debt market activity levels in the coming months.