Determining the credit rating for GCC-based organisations is becoming a rising concern, since many leading firms do not believe the evaluations by international rating agencies.
Gulf ratings agency would challenge 'big three'
Peter Barker-Homek is not happy with the way ratings agencies are running the rule over government-related agencies such as his. The chief executive of the Abu Dhabi National Energy Company (Taqa), the Government-backed energy investor, says now may be the time for a home-grown agency to challenge the dominance of the big three: Standard & Poor's Ratings Services (S&P), Moody's Investors Service and Fitch Ratings. "Do we need a regional rating agency? The answer is yes," Mr Barker-Homek says. "It's a brilliant idea. There are examples of Japan, India and Canada having country-specific rating agencies. Our region can benefit with one of its own." The global recession has made it harder for corporations to raise debt, and the rising risk of default has sometimes strained relations between companies seeking funds and the ratings companies they hire to assess their creditworthiness. Taqa ended its relationship with S&P after the agency put the company on credit watch, implying a risk of downgrade. Many companies in the region are now asking whether international agencies use the correct methods when rating government-related entities such as Taqa. Companies linked with a government dominate the region's corporate landscape. Some analysts say there is a need for a GCC-specific ratings organisation that is more familiar with the structure of companies with government backing. Credit ratings determine the risk of default and thus, the cost for a company to raise funds. With the region's government-backed companies raising tens of billions of dollars a year, ratings downgrades can have huge implications for the Gulf's economy. Mr Barker-Homek says the criteria used to assess the region's companies are generally based on established European and North American business models and do not necessarily factor in the correct weighting for government support. Jan Willem Plantagie, the regional manager of S&P in Dubai, which rates about 25 government-related entities in the Gulf region, disagrees. "We hear a lot about not factoring in cultural issues but that happens when people don't agree with our rating actions," Mr Plantagie says. "The argument that we don't understand the region is wrong and we have received very positive comments on our new government-related entities rating methodology." He dismisses suggestions that S&P is applying its rating criteria on the Gulf's government-related entities more strictly than other parts of the world. "We apply criteria on a global basis. To say we are treating GCC entities more severely than others is not true," Mr Plantagie says, adding that he does not expect other government-backed firms to follow Taqa's lead and end their relationship with the company. International ratings firms have come under the spotlight since the subprime crisis started to unfold in the US and questions have been asked over the rating methods used for some failed financial instruments and institutions. Agencies are now changing the way they rate government-related entities, where the significance of government support ranges from "critical" through "very important", "important" and "limited importance", while the nature of the link between the government-related entities and the government ranges from "integral" through "very strong", "strong" and "limited". In January, S&P had asked for comments on the new method and published the results at the end of last month, at the same time putting Taqa and the Qatari shipping firm Nakilat on review for possible downgrade. "I can see why that works in a theoretical environment, but for me S&P is painting too many colours within the GRE (government-related entities) basket and it doesn't work in the UAE," Mr Barker-Homek says. He maintains that the UAE, and Abu Dhabi in particular, strongly supports national companies. "There is no doubt in my mind if Taqa ever falls in trouble, Abu Dhabi will come to its rescue," Mr Barker-Homek says. S&P last month downgraded Dubai Ports World, Jebel Ali Free Zone and Dubai Multi Commodities Centre Authority. S&P said the rating revisions reflected changes in its global evaluation system of government-related agencies and uncertainty surrounding Dubai's willingness to provide extraordinary financial support to them. In April, S&P said it would review government entities because it was no longer certain of support after the Government allowed Nakheel, the Dubai World company that is building the emirate's three palm islands, to enter restructuring talks to refinance its US$3.5 billion (Dh12.83bn) Islamic bond, which is due in December. Dubai last week announced that it was preparing to raise the second half of a $20bn bond to help its government-related companies return to stability. The new entity established to oversee the funds also plans to raise more funds if required, a move analysts say is a clear indication of support for the government-related entities and should be reflected in the way these firms are assigned ratings. "It's a good positive step towards transparency but it is still not known who gets what amount," Mr Plantagie says. Traditionally, there have been only the three voices of importance in the ratings world, but the idea of a fourth choice has largely been welcomed by the others. "At S&P we welcome competition and any new agency which can further force transparency in the region is good, as long as it is following the international standards applicable to all," Mr Plantagie says. Khalid Howladar, the vice president at Moody's Middle East in Dubai, agrees with the idea of giving investors more choice in evaluating perceived risk. "There are three opinions in the market right now, and an extra one with a different perspective could be a good addition," Mr Howladar says. He acknowledges the rating actions of the three internationally recognised agencies were opinions, not facts. "It is for the benefit of the investors to help them assess risk but only they can make up their minds on investment decisions," Mr Howladar says. "If ratings by another agency in the region could help, it's good for them." He believes there are working models on which a regional body could be set up and help force more transparency on issuers. One could be to set up a government body on a GCC level, with a legal mandate to collect credit information on corporations and individual borrowers so that it could be passed on to the banks and rating agencies of choice on the condition of confidentiality. "We are a transparent but private firm and perhaps the credit information is not passed on to us that easily," Mr Howladar says. "But for the sake of the transparency it could be given to a fourth body, which can complement rating actions of other agencies." Practical progress in establishing such an institution has not gone beyond the academics and analysts who are evaluating its potential. "There is definite potential for such a body and a few people in Kuwait and Saudi Arabia are already working on the different models," says Wadah al Taha, an independent analyst in Dubai. Mr al Taha advocates a departure from the general criteria used by the big three, towards a model that better reflects the creditworthiness of corporations and relies on more frequent appraisals. "Rating firms will have to consider region-specific strengths and weaknesses in different environments," he says. "Unless it is done, true risk or underlying business fundamentals of an issuer can't be fully explained to investors." Mr al Taha points out that GCC governments cannot afford to allow important corporations to fail as the trickle-down effect would be catastrophic. Mr Howladar agrees. "We reflect the differences in the local environment in our analysis," he says, adding that there traditionally is more will to intervene and stop a company failing in the region than in the West. "We look at the GCC as a high support environment. When the US let one key bank default, everything globally became much worse. Now in the UK, for example, the government has stakes in many banks, which is similar to what the governments have been doing in the Middle East for a long time." But some observers question the need for a home-grown ratings body. "If companies are looking to the international market place, one has to standardise how companies are rated for international investors," says Ali Khan, the managing director at Arqaam Capital in Dubai. "It is a fact that rating firms are not foolproof and in some cases were behind the curve on ratings, but it's better to give them a chance to improve their system instead of creating a new agency." Mr Khan says that even if there is a will to establish such a body, it will be some time before it happens. email@example.com