x Abu Dhabi, UAEFriday 28 July 2017

Credit rating firms may face changes after US criticism

Senate study says S&P and Moody's ignored the danger signals ahead of credit crisis

Asa Fitch The US effort to overhaul financial regulations and a critical congressional investigation into two major ratings agencies could change the way they operate in the Gulf. The US Senate yesterday released the results of an 18-month investigation into Standard & Poor's and Moody's Investors Service.

The report found that the agencies ignored indications of fraud and bad lending that led to the subprime crisis in the US. "Credit rating agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability," the senator Carl Levin, the Michigan Democrat who leads the investigative panel, said yesterday, according to Bloomberg. "They did it for the big fees that they got."

It is unclear whether similar problems may have occurred in the Gulf and government officials here have yet to call for any review or tighter oversight. Officials at the ratings agencies say any changes to the way they operate stemming from laws passed in the US and Europe would likely to be adopted in the Gulf and elsewhere. Ali Khan, a director at Arqaam Capital in Dubai, said the precise impact on the region of any new regulations would be clear only when they are signed into law. But he said any rules that resulted in more downgrades would be closely watched by analysts and investors.

A bill to strengthen financial regulations in the US may come under debate as early as next week in the US Senate. It could include new restrictions for credit ratings agencies and grant broader rights to sue if the agencies are found to have misled investors. "Since we provide global ratings for global investors, we have to apply the same standards and policies globally," said Martin Winn, a spokesman for S&P based in London. "That means we will implement requirements of both the US and European regulations internationally, not just in the US and Europe, in order to support the consistency of our ratings around the world."

All three major ratings agencies - S&P, Moody's and Fitch - changed recently their approaches to rating companies in the Gulf and elsewhere, which has already resulted in a wave of downgrades. The agencies started to make downgrades last year after turmoil in the global economy spread to the UAE. More recent problems at Dubai World have led to further downgrades. Companies including the Dubai Multi Commodities Centre, the ports operator DP World, Emaar Properties and Dubai Holding Commercial Operations Group have seen their ratings lowered in recent months.

The downgrades have not been limited to Dubai. Moody's last month downgraded six Abu Dhabi government-owned companies. S&P earlier this month put several entities in the capital on watch for possible downgrades. Credit ratings try to determine the likelihood of a company or government defaulting on financial obligations and act as a risk gauge for investors. They are important because lower ratings can lead to higher financing costs for companies.

afitch@thenational.ae