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GCC Asset Sales Will Increase Transparency, Broaden Funding Sources, And Support Capital Market Development

This report does not constitute a rating action.

GCC countries have been accelerating sales of minority stakes in their GREs and recently made a slew of announcements about several to come. Here, S&P Global Ratings discusses the implications of this trend for GREs, focusing on Saudi Arabia and the United Arab Emirates.

The implications for credit ratings

Notwithstanding the positive trend, we expect these developments to be broadly credit neutral for sovereign creditworthiness in the GCC. We do not expect revenue generated by the share sales to materially improve the public finances of the respective governments. We view the GRE sector as generating only limited contingent liabilities for their respective governments in most of the region. We believe that, with the exception of Oman, GCC governments have sufficiently strong balance sheets, in relation to the level of outstanding GRE debt, to absorb financial distress in the GRE sector, without materially worsening their overall fiscal positions. Nevertheless, we note that bringing in private investors should share the burden of any costs related to financial distress at the GREs beyond the government. More generally, if the new shareholders bring expertise and new technologies, along with their equity injections, the respective economies could benefit from increased productivity.

For nonfinancial corporates, we see increased institutional investor participation and stock market listings as supportive for governance practices, particularly regarding financial reporting and transparency, given more stringent regulatory requirements for listed entities. What's more, we see nonfinancial corporates' ability to diversify their investor bases and reduce dependence on bank borrowing as supportive factors for their funding profiles.

For banks, we expect government support to be forthcoming not only to entities controlled by the government but also to private-sector banks. This is one of the reasons why regulators in the region have been relatively slow to adopt recovery and resolution regulations. Over the past few years, we observed a trend of GCC government shareholders merging their assets to form larger banks. The most recent transaction was the merger of the National Commercial Bank and Samba Financial Group to form Saudi National Bank. Such developments could help the governments to finance their strategic initiatives and economic transformation plans, though we expect such financing to be done at arm's length. In addition, part of the capital of these banks is generally listed on the local capital markets to help them develop and share the wealth with the local population.

Our ratings on insurers typically do not benefit from uplift for government support. This is because governments usually only hold minority stakes if they invest in insurers and, therefore, do not influence strategic decisions and operations more than any other minority shareholder. However, given that UAE insurers hold on average more than one-third of their assets in banks, through cash deposits, equity, or fixed-income investments, our assessment of their risk exposure benefits from the enhanced creditworthiness banks in the region gain from government ownership.

Our ratings on GREs in the GCC

S&P Global Ratings rates 22 GREs in the region (see table 1). A number of them have already been listed as part of past initiatives. In assigning ratings on GREs, we use our criteria "Rating Government-Related Entities: Methodology And Assumptions," published on March 25, 2015. In assigning the stand-alone credit profile (SACP) of the GRE, we apply the sector-relevant corporate criteria.

Table 1

Ratings On Government-Related Entities In GCC Countries
In order of likelihood of government support from almost certain to low
Government-related entity (GRE) Sector Government shareholder Sovereign long-term local currency rating Likelihood of extraordinary government support SACP Notches of uplift from SACP due to government support Long-term foreign currency rating on the GRE

Bahrain Mumtalakat Holding Co.

Investment Holding Company Bahrain B+ Almost Certain N.A. N.M. B+

Emirates Development Bank PJSC

Financial Institutions United Arab Emirates NR Almost Certain N.A. N.M. AA-

Mamoura Diversified Global Holding PJSC

Industrial Conglemerate Abu Dhabi AA Almost Certain N.A. N.M. AA


Energy Qatar AA- Almost Certain aa (1) AA-

Saudi Electric Co.

Utilities Saudi Arabia A- Almost Certain bbb- 3 A-

Industries Qatar QSC

Energy Qatar AA- Extremely High bbb+ 3 A+

Nakilat Inc.

Energy Qatar AA- Extremely High bbb- 5 A+

Abu Dhabi Ports Co. PJSC

Transportation Abu Dhabi AA Very High bbb 4 A+

First Abu Dhabi Bank PJSC

Financial Institutions Abu Dhabi AA Very High a- 3* AA-

Qatar National Bank QPSC

Financial Institutions Qatar AA- Very High bbb 3 A

Abu Dhabi Commercial Bank PJSC

Financial Institutions Abu Dhabi AA High bbb 3 A

Emirates Telecommunications Group Co. PJSC

Telecom Services United Arab Emirates NR High aa- 0 AA-

Ooredoo QPSC

Telecom Services Qatar AA- High bbb- 3 A-

Saudi Basic Industries Corp.

Energy Saudi Arabia A- High a+ (2) A-

Saudi Telecom Co.

Telecom Services Saudi Arabia A- High a+ (2) A-

Sweihan PV Power Company PJSC

Project - Utilities Abu Dhabi AA Moderately High bbb- 2 BBB+

Abu Dhabi Crude Oil Pipeline

Project - Energy Abu Dhabi AA Moderately High aa 0 AA§

Bahrain Telecommunications Co.

Telecom Services Bahrain B+ Moderately High bb+ (3) B+

Emirates SembCorp Water & Power Co. PJSC

Project - Utilities Abu Dhabi AA Moderately High bbb+ 1 A-§

Ruwais Power Co. PJSC (Shuweihat 2)

Project - Utilities Abu Dhabi AA Moderately High bbb- 2 BBB+§

Company for Cooperative Insurance (Tawuniya) (The)

Insurance Saudi Arabia A- Moderate bbb+ 0 BBB+

Almarai Co.

Consumer Staples Saudi Arabia A- Low bbb- 0 BBB-
*We included one additional notch of uplift to the long-term foreign currency rating based on our view of the entity's importance in financing Abu Dhabi's economy and its proximity to the government, which has a strong track record of supporting the bank when needed. §Issue credit rating. Ratings and assessments as of March 18, 2022. N.A.--Not available. N.M.--Not meaningful. NR--Not rated. SACP--Stand-alone credit profile. Source: S&P Global Ratings,

The majority (68%) of ratings on GREs in the GCC are either equalized with the sovereign rating or benefit from some uplift to their SACP. This is broadly to be expected, as most GREs have been created to serve a specific policy role or provide a key product or service to the population. Five ratings on GREs (23%) in the region are equalized with the government owner's local currency rating, indicating that we view the likelihood of sufficient and timely extraordinary government support, should the entity experience financial distress, as almost certain. Ten ratings on GREs in the GCC (45%) that are not equalized with the sovereign rating benefit from some uplift above their SACP, in the issuer credit rating.

Several Policy Goals Are At Play

Deepening the capital markets.  Despite gradual improvements over the years, the GCC region's equity capital markets remain relatively underdeveloped. Global investor activity outside sovereign debt and GRE issuance has been relatively limited, and except for Saudi Arabia's Tadawul, most stock exchanges in the region have low trading volumes on the secondary market.

Although growing, the GCC's private sector is relatively underdeveloped and dominated by family groups whose funding remains dominated by local banks. The large economic footprint of governments and their related entities in key sectors is a common feature of GCC countries. We believe the increased participation of large GREs in the capital markets will not only create momentum for the capital markets but also provide institutional investors access to key strategic sectors of the region--such as oil and gas and utilities--and further increase investor interest. In Saudi Arabia, for example, we have seen a visible jump in trading values and liquidity on the back of key IPOs for GREs over the past few years.

Chart 1


Diversifying sources of funding away from hydrocarbon.  We expect the gradual monetization via the sale of noncontrolling stakes in the GREs to continue, notwithstanding the recovery in oil prices, as we view the strategy as part of long-term government plans to improve the structure of their economies. However, we note that the sharp drop in oil prices beginning in late 2014 may well have been an impetus for the current policy direction. Low oil prices resulted in sizable central government deficits in most GCC countries and likely encouraged them to explore various other means to improve the financial performance of their GREs and raise capital for the GREs and for the wider economy.

For example, the almost $30 billion raised via the sale of 1.73% of the shares of Saudi Aramco in December 2019 was transferred to the government's Public Investment Fund (PIF) to be invested both locally and overseas. Monetization of government assets can act as a channel to attract foreign investment to support the government's agenda, including its economic diversification plans. Media reports in February 2022 suggest that a further stake in Aramco might be sold.

Once the GREs are on a sufficiently strong financial footing to attract foreign investors, the government's overall fiscal position may also improve via dividends from the GREs or a reduced need for the government to support them either through subsidies or annual transfers. And, the monies raised can be used to support the entities' funding needs or capital investment programs.

Strengthening corporate governance practices and transparency.   As we previously discussed (in our report "Corporate Governance Practices In The GCC," published on March 15, 2021), corporate governance of GCC-based companies remains below international best practices, despite improving over the past decade. We believe that governance practices are stronger for companies active in the capital markets because they are subject to greater regulatory scrutiny, disclosure, and market discipline. Similarly, government ownership appears to bring closer supervision of certain basic governance practices.

Listing of an entity's shares on a stock exchange tends to increase the focus on the entity's financial performance. Where GREs remain controlled by the government, any public policy goals it has for them are less likely to be implemented if they can harm the entities' financial standing. Listing can also result in a clearer delineation between the government's regulatory and shareholder roles.

Moving along in the energy transition.  It makes sense for regional governments to monetize some of their related assets, given currently high commodity prices and pressure on the oil and gas industry coming from the energy transition. Yet, in our view, these energy transition risks are less of a concern for the GCC energy companies than for those in other regions (see "GCC Low-Cost Producers May Be Better Placed Than Most Oil And Gas Majors As The Energy Transition Heats Up," Sept. 27, 2021).

Sharing wealth with the local population.   The 2003 IPO of Industries Qatar, where 30% of the company was sold to Qatari citizens and Qatari entities, in our view is a good example of how monetizing GRE assets can further a government's goal of distributing wealth and increasing financial sophistication among the population. Wider share ownership can help change public attitudes, encouraging more reliance on the private sector rather than the government.

Country Experience: Saudi Arabia And The UAE Are Leading The Pack

Saudi Arabia

Under Vision 2030, Saudi Arabia is working on diversifying away from oil; promoting the development of the private sector with investments across various sectors such as tourism, energy, industry among others; and further deepening its capital markets (see "Vision 2030 Will Push Forward Saudi Arabia’s Debt Capital Market," published May 4, 2021). For example, under Shareek, its public-private partnership program, the Kingdom wants to invest around Saudi riyal (SAR) 5 trillion ($1.3 trillion) into its economy, where Saudi GREs will play a very important role in investing across the strategic sectors as well as raising the necessary capital. Because the PIF holds large positions in most key GREs, including STC, SEC, ACWA, among many others, the sovereign wealth fund will play a central role in the monetization, capital raising, and investment allocation decisions under the program.

Aramco's successful IPO in late 2019 was a major milestone, and while 2020 was a slow year, plagued by COVID-19 related disruptions, we saw a significant acceleration in activity in 2021. Aramco announced two large sale and lease-back transactions in 2021 to monetize future cash flow from its pipelines. In April 2021, it announced a 49% stake sale in Aramco Oil Pipelines Co. to a consortium led by EIG Global Energy Partners for upfront proceeds of $12.4 billion. The entity has lease usage rights to Aramco's crude oil pipeline network for 25 years. In December, Aramco announced it reached a similar deal to sell a 49% stake in a newly established entity that holds 20-year leasing rights over pipelines carrying its gas across the Kingdom to a group led by BlackRock Inc. (AA-/Stable) and Hassana Investment Co. for upfront proceeds of $15.5 billion.

In 2021, three companies controlled by the PIF had equity market transactions. International Co. for Water and Power Projects, one of the largest players in the utilities space as a developer, investor, and operator of power generation and water desalination plants in over 60 countries, listed its shares on the Tadawul. In addition, Saudi Telecom Co. (A-/Stable/A-2) listed 20% of its shares in its subsidiary Arabian Internet and Communications Services Co. Ltd. on the stock exchange. Finally in December 2021, Tadawul itself, the largest exchange in the Middle East in terms of traded value, also floated its shares.

Table 2

Recent IPOs By Key Government-Related Entities In Saudi Arabia
Issuer IPO Proceeds (mil. $) IPO closing date Shares offered at the IPO (%)
Saudi Tadawul Group Holding Co. 1,021 02-Dec-21 30.0
International Company for Water and Power Projects 1,228 01-Oct-21 11.1
Arabian Internet and Communications Services Co. 978 21-Sep-21 20.0
Saudi Arabian Oil Company (Saudi Aramco) 29,400 04-Dec-19 1.7
Source: Tadawul.

Given the ambitious Shareek agenda, we expect continued elevated activity in the Kingdom over the next few years across all key sectors, while PIF will potentially remain the key actor. On Dec 14, 2021, PIF completed the sale of a 6% stake in Saudi Telecom Co. through a secondary offering for $3.2 billion, retaining majority ownership of 64% (see "Bulletin: PIF’s 5.01% Stake Sale Does Not Change Our View Of Saudi Telecom Co.’s Government Links Or Likelihood Of Support," published on Dec. 7, 2021).

United Arab Emirates

Over the past five years, we have seen efforts by the Abu Dhabi government to reorganize some of its GREs, optimize their performance, further improve their governance, and bring in institutional investors to support the development of Abu Dhabi's non-oil economy and its capital markets.

Within that context, there have been large mergers, which initially started in the banking space--such as the merger of First Gulf Bank and National Bank of Abu Dhabi in 2017 or the merger of Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank. They spread to key sovereign wealth funds, such as the merger between Mubadala and IPIC as well as the establishment of ADQ, as a new sovereign wealth fund in 2018 via the transfer of key assets. Given the Abu Dhabi government's intention to use its portfolio more actively, we expect both Mubadala and ADQ to remain active players in the equity capital markets over the next few years.

Abu Dhabi National Oil Co. (Adnoc; unrated) has been the leading entity for the Abu Dhabi government in terms of opening its key assets to institutional investors via private and equity market deals. In 2019, the state-owned oil company sold a 40% stake in Adnoc Oil Pipelines, an entity that leases the oil company's interest in 18 pipelines, transporting crude oil and condensates across Adnoc's upstream concessions for a 23-year period to a consortium led by KKR and BlackRock for $4 billion. On June 2020, Adnoc announced a similar infrastructure deal where it sold a 49% stake in Adnoc Gas Pipeline Assets LLC to a consortium of investors for upfront proceeds over $10 billion. Finally, on September 2020, it announced it entered into an agreement with Apollo Global Management, where it sold a 49% stake in Abu Dhabi Property Leasing Holding Co. RSC Ltd., which holds a real estate portfolio valued at $5.5 billion, to raise $2.7 billion.

In terms of equity market deals, in 2017 Adnoc listed Abu Dhabi National Oil Co. for Distribution PJSC for $851 million and undertook a secondary offering in 2021, raising additional funds. In 2021, it listed a stake in Adnoc Drilling on the ADX for $1.1 billion, while Fertiglobe where Adnoc has a stake also listed its shares on the ADX, raising $795 million.

Transactions outside Adnoc included Yahsat, a satellite operator controlled by Mamoura, which in 2021 listed 40% of its shares on the ADX, raising $731 million.

We expect the GRE IPO market to remain active in 2022 as well. On October 2021, the Abu Dhabi government launched a United Arab Emirate dirham (AED) 5 billion ($1.4 billion) IPO fund that will invest in 5-10 private-sector new listings on the ADX every year.

In February, Abu Dhabi Ports (A+/Stable), which is controlled by ADQ, one of the largest sovereign wealth funds in the UAE, floated its shares on the ADX (see "Abu Dhabi Ports' Equity Placement Will Temporarily Boost Financial Buffers," Feb. 8, 2022).

Similarly, in November 2021 the Dubai government announced several initiatives. After making several changes to the management of the Dubai Financial Market, the emirate's stock exchange, it announced the intention to float 10 state-owned companies, and that an AED2 billion (USD 545 million) market maker fund would be established to encourage listings and facilitate secondary trading. There is currently no clear timeline for the prospective listings, and details have been limited. The emirate has made an official IPO announcement for Dubai Electricity and Water Authority, while the local press has mentioned various other names as being in the process of launching an IPO.

Unlike in the banking sector, there has been no meaningful M&A activity in the insurance industry so far, even though the government holds direct or indirect shakes in several Abu Dhabi-based insurers. We therefore consider consolidation of entities with common shareholders as a likely scenario over time. However, given insurers' still relatively small size, compared with banks and some corporates, we do not believe that consolidation and monetization are currently a top priority.

We also note that Abu Dhabi's government has announced plans to create the largest health care provider in the UAE by consolidating several companies, including the National Health Insurance Co., known as Daman, under the umbrella of Pure Health, which is in the process of going public. Although further details are not available yet, the government may monetize some of Daman's shares through this transaction.

Related Criteria and Research

This report does not constitute a rating action.

Primary Credit Analysts:Timucin Engin, Dubai + 971 4 372 7152;
Trevor Cullinan, Dubai + (971)43727113;
Mohamed Damak, Dubai + 97143727153;
Emir Mujkic, Dubai + (971)43727179;
Secondary Contacts:Benjamin J Young, Dubai +971 4 372 7191;
Sapna Jagtiani, Dubai + 97143727122;
Sofia Bensaid, Dubai +971 (0)4 372 7149;

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