The value of rights issues on Gulf equity markets in the first three quarters of 2005 had exceeded to $9.1 billion more than ten times the level of the whole of last year, said a report by Trowers & Hamlins.
Gulf companies are increasingly raising money through equity route rather than taking loans to raise finance to fund organic growth and acquisitions. The GCC markets have raised approximately $15 billion during the past 12 months. Some $10.26 billion was raised in the second half of 2005, while $4.43 billion was raised during the first half of this year.
The increasing number of equity issues demonstrates the confidence Gulf companies have to pursue aggressive expansion strategies. “The huge amount of cash companies are raising through these issues will not only fund investment projects but add fuel to the current wave of M&A activity undertaken by Gulf based companies,” the report said.
According to the report, about 36 per cent of the rights issue took place in the UAE, 27 per cent in Saudi Arabia and 18 per cent in Kuwait. The region's market analysts and fund managers blame the big rush of rights issues initial public offerings (IPOs) during last year to the current woes of the the regional markets.
“At the height of the market boom many companies raised money from the market through rights issues without proper plans for the deployment of the newly raised capital. While these issues have sucked the liquidity out of the market, many companies are yet to deliver the performance matching the investor expectations,” said an analyst.
A big portion of the gains from the bull market were ploughed back into rights issues with the hope of them coming back with multifold gains. Contrary to the expectations, these issues absorbed liquidity from the market and the gains in terms of corporate performance yet to bee seen.
The huge rights issues along with bonus issues from many companies such as Emaar, First Gulf Bank and Dubai Islamic Bank, to name a few, have more than doubled their capital. The increase in number of shares have directly impacted the share prices, in addition, the severe correction which the market went through since the beginning of the year have brought down the share prices of these companies to less than one quarter of their prices at the the time when the market was at its peak.
Trowers and Hamlins report said that Middle Eastern investors have big appetite for equity and the recent conflict in Lebanon will not have any long term impact on the region's economy. According to the report, the opportunities to reinvest oil money locally have historically been limited. However, rising consumer spending in the Gulf is pushing more business plans into profit.
The use of sophisticated financial instruments, such as rights and bond issues, should see the region better placed to achieve sustainable, long-term growth.
Standard commercial lending, the report said, is losing its position as the dominant source of finance as companies turn to bonds, equity and longer term Islamic finance for funds.
With the reliance on short-term debt diminishing, Gulf economies should be insulated from the kind of credit squeeze that crippled Asian economies in the 90s.
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