Moody's Investors Service seems to want the Abu Dhabi Government's support of its state-controlled companies in writing. Moody's last week cut its credit rating on six Abu Dhabi Government-controlled companies, citing a lack of "explicit" government guarantees. They included Mubadala Development, the company investing in industries that are strategic to the Government's vision, such as aerospace; and Aldar Properties, the developer of Yas Island. Executives and analysts said the downgrades were almost certain to push up borrowing costs for the companies affected.
"It is impossible to differentiate between the Government and any of these three entities in terms of credit risk," says Hamad al Hurr al Suwaidi, the Undersecretary of the Abu Dhabi Department of Finance, in reference to Mubadala, TDIC and Aldar. That may have been the most explicit public statement of support so far from the Government, but to Moody's it was neither explicit nor new. When it announced its downgrades, it noted that "the Government has formally assured Moody's that it fully and unconditionally stands behind these entities for any debt, both principal repayments and debt servicing".
Far from reflecting any change in the financial condition of the six companies affected, or in the Government's stated commitment, therefore, Moody's revisions have more to do with a new-found scepticism in the way the agency regards government assurances in general. "Globally, a lot of these assumptions are being tested," says Philipp Lotter, who oversees corporate ratings at Moody's in Dubai. Last month, for example, Moody's raised the Saudi Arabian government's credit rating but left the ratings on the companies it controls - including the Saudi Basic Industries Corporation (SABIC), Saudi Telecom and Saudi Electricity - unchanged. The result was a downgrade for the companies relative to the sovereign's rating.
Moody's analysts explain that to them an "explicit" guarantee is more than a verbal assurance. It is a legally binding, documented guarantee built into the contract terms of the loan. Anything less requires a degree of faith on the part of investors and thus represents an "implicit" guarantee. In the past, an implicit guarantee was enough to get a government-controlled company a rating on par with the government.
Not any more. After the global financial crisis and Dubai World's restructuring, the agency is re-examining how it approaches "government-related issuers" (GRIs) such as Abu Dhabi's International Petroleum Investment Company (IPIC), or the Abu Dhabi National Energy Company (Taqa). "The demands we place on governments to obtain the highest ratings on their GRIs have got to be tougher," says Mr Lotter.
These are already tough times for ratings agencies. Having failed to foresee the subprime crisis, Moody's and its two major competitors, Fitch Ratings and Standard & Poor's (S&P), have come under intense criticism about everything from the way they assess credit risk to who pays them to do it (the borrower). Now legislation is winding its way through the US Congress that would subject the agencies to greater scrutiny. Angry investors have filed dozens of lawsuits against them - including Abu Dhabi Commercial Bank, which is part of a class-action legal proceeding against Moody's and S&P - accusing them of inflating ratings on investments related to subprime mortgages.
To say that caution is the watchword at the big three ratings agencies, therefore, is an understatement. Analysts at the firms say they are under renewed pressure not to take anything for granted when it comes to evaluating potential risks. That might explain the series of disagreements between the ratings firms and clients in the Gulf over disclosure. Investcorp and Global Investment House in Bahrain, Saad Group in Saudi Arabia, and Taqa and Emirates Aluminium have all parted ways with one of the three agencies in the past 18 months over ratings and the disclosures required to keep them.
But Moody's decision in December to place Abu Dhabi's Government-owned companies on review for possible downgrades raised eyebrows around the industry. Neither Fitch nor S&P is considering reviewing their ratings on Abu Dhabi companies, which are now higher than Moody's. "We continue to take the view that links with the sovereign are very strong, and that the Government has the capacity to support Mubadala, IPIC and TDIC [the Tourism Development and Investment Company]," says Charles Seville, a sovereign ratings analyst at Fitch in London.
So does Moody's. Abu Dhabi has enough assets to pay off all the foreign debts owed by the entire UAE and still have cash to spare, says Tristan Cooper, a Moody's sovereign analyst in Dubai. And Moody's says its ratings still take into account a high likelihood of government support. Deprived of any such assumptions of government guarantees, Abu Dhabi's borrowers would be rated on what agencies call a stand-alone basis. And if that were the case, two of them - Taqa and the TDIC - would be pushed below investment grade.
What troubles Moody's is that it has heard assurances of public support for government-controlled companies before. When Moody's first issued a rating for one of Dubai's big property-orientated conglomerates, it was for Dubai Holding, which received a rating just two notches below the Abu Dhabi Government based on "the group's intrinsic financial strength and the credit enhancement that can be derived from the financial strength of the emirate and the group's ultimate owner", who is Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.
Neither Dubai nor Dubai World ever sought a credit rating, although when Dubai World borrowed, "it was representing itself as an arm of the Government", Mr Lotter says. On November 25 last year, Dubai announced that it would step in to manage Dubai World's restructuring process, and as a first step would be asking creditors for a standstill on debt repayments. To a lender or a credit-rating agency, anything short of full and timely repayment represents a default, so this news was to Moody's a watershed.
But more revealing to Moody's was that Abu Dhabi did not prevent the November 25 announcement. Mr Cooper said in January that Moody's had long recognised Dubai had a limited capacity to support the growing debts of its own companies, so any such support, if needed, would have to come from Abu Dhabi or the Federal Government. That Abu Dhabi's support came only after Dubai World's standstill request sent up a red flag at the agency. So did the fact that Abu Dhabi's US$10 billion (Dh36.73bn) in new support funds was said to be contingent on Dubai World winning an agreement from its creditors to delay its debt repayments.
That is not necessarily wrong, from the perspective of Moody's. Bailing out a company and its creditors once its business model no longer supports its debt levels is not good business. But for a government to demonstrate a willingness to let such a company default changed the view of Moody's on the durability of any implicit guarantees. In a comment published in January, Moody's spelt out its criteria for reviewing Abu Dhabi corporate ratings, noting that government support might be less likely if a company could be allowed to default without affecting its operations or losing control of them.
Governments are also less likely, the report said, to support companies that are financially weak. "Dubai World is also an illustrative example that some issuers can default without creditors being able to force a bankruptcy or enforce judgements that would impair the Government's control," the report said. "This condition makes default less painful to the sovereign, and therefore support is much less likely."
Analysts at Moody's said they had no doubt that under present circumstances, politically and economically, Abu Dhabi would come to the rescue of its six companies if they ran into trouble. firstname.lastname@example.org