x Abu Dhabi, UAEThursday 18 January 2018

Love 'em or hate 'em, they still have to rate 'em

Many the big three of Moody's, Standard & Poor's and Fitch directly for the subprime crisis that lit the fuse on the global credit crunch.

The ratings agencies have had a bad crisis. Many have blamed them - and by "them" I mean mainly the big three of Moody's, Standard & Poor's and Fitch - directly for the subprime crisis that lit the fuse on the global credit crunch. The US authorities are in the process of a thorough reform of the raters to pre-empt the possibility that such a fiasco could recur. Gulf corporations have had a love-hate relationship with the raters for some time now. Before the crisis hit the region last year, corporate treasurers were falling over themselves to get that elusive "AAA" star prize that meant they could get the best possible terms in international capital markets.

Since the collapse last autumn, the dreaded word "downgrade" has been enough to send the same executives hurrying for cover, turning share prices (where they exist) and balance sheets red in an instant. Peter Barker-Homek, the chief executive of the Abu Dhabi National Energy Company (Taqa), made an invaluable contribution to the debate over the excessive power, and obvious shortcomings, of the raters earlier this week.

He issued a forthright call for a regional ratings agency that could bring specialist expertise to bear on the corporate sector, and especially the government-related enterprises that form such a large chunk of it. I can't help thinking, however, that he has the right idea but the wrong execution. In an interview with this newspaper, the Taqa boss presented the issue in as blunt a form as I've ever seen: "There is no doubt in my mind if Taqa ever falls in trouble, Abu Dhabi will come to its rescue," he stated with the self-confidence of a man who has the energy-rich UAE capital as his principal shareholder.

Mr Barker-Homek's beef with the raters is that they do not give this cast-iron guarantee sufficient weight when assessing companies such as Taqa. In a region where the government-related enterprise structure is the norm and governments are generally cash rich, it is almost inconceivable such big strategic corporations would be allowed to fail. There is too much at stake, too much national pride and too much national employment riding on the continued success of government-related enterprises for any major to be allowed to slip under in the way, for example, Lehman Brothers or Chrysler were allowed to go in the US.

In cash-strapped Dubai, there is a fundamental determination to help the big government-related enterprises through the funding crisis, even if it is with Abu Dhabi-backed money. That is the whole point of the Financial Support Fund set up by the Dubai Government with US$10 billion (Dh3.67bn) backing from the UAE Central Bank and a further $10bn in the pipeline. So Mr Barker-Homek's central point is correct: the raters simply do not assign sufficient importance to this implicit sovereign guarantee when they assess the region's companies.

Indeed, his broadside against them seems to be at least in part motivated by S&P's decision to put Taqa on review for possible downgrade, despite Mr Barker-Homek's conviction that his backers are as blue-chip as can be. The raters are running scared at the moment anyway. Barack Obama, the US president, has them in his sights with proposed legislation designed to end conflicts of interest among the agencies and those corporations they are supposed to judge, guarantee more equal access by investors to the information on which the raters make their decisions, and put the whole industry under the supervision of the federal Securities and Exchange Commission.

Even more ominously for the agencies, there are a rash of legal actions in train in the US by investors who blame them for the billions lost in the subprime fiasco. Calpers, the giant Californian pension fund, is leading the way, but it is certain that many more public investing institutions will follow suit. The legal industry in the US is rubbing its hands in glee. But I am not sure Mr Barker-Homek's solution is completely thought through. He calls for a regional ratings agency, possibly established under GCC guidelines, able to deliver a more expert and specialised service. This body would have access to confidential information from corporations, which could even be required by law to provide such vital statistics.

There are three main objections to this proposal. One, it has been tried before, in the prototype Emcredit initiative set up with Dubai Government backing. The proposal received a lukewarm reception from UAE banks, many of which failed to sign its protocol. Second, and despite the US proposals, there is something incongruous about asking regional governments to play a major role in assessing the creditworthiness of their own companies. Given the prevalence of the government-related enterprise structure and philosophy in the Gulf, this would leave the proposed "regional rater" open to the same charges of conflict of interest which the US is now battling.

Third, and perhaps most significant, is the simple fact that, love 'em or hate 'em, the big three are the closest we have to international adjudicators of creditworthiness, working to guidelines of international best practice and trying to apply uniform rules of assessment. To shackle them to national or regional governments seems to be a further step back from globalisation, and on to the dark path of protectionism. That is a dangerous step.