x Abu Dhabi, UAEWednesday 17 January 2018

Severed ties in the rating game

It is not often that businesses and the companies that assess their creditworthiness quarrel to the point of divorce, but when Dubai World's debt trouble revealed that a state bailout could not be assumed, a series of relationships became untenable.

Illustration by Lee McGorie / The National
Illustration by Lee McGorie / The National

When Standard & Poor's lowered the credit rating and severed ties last month with a division of Dubai Holding, the Government-owned conglomerate, few people within Dubai's small community of ratings analysts wanted to talk about it. S&P issued a press release announcing the decision, but its local analysts soon received orders from on high to keep mum.

The silence continued even after Dubai Holding Commercial Operations Group (DHCOG), the parent company of Dubai Properties, Jumeirah Group and several other prize property and investment arms, issued a statement of its own saying it, not S&P, had decided to break the relationship. S&P made "inaccurate statements coupled with factual errors that are misleading", Dubai Holding said, while Dubai Holding had shared "adequate information frequently and in a transparent manner" with S&P. The agency, meanwhile, said it withdrew DHCOG's ratings because of "an inadequate timeliness and level of financial information we expect to receive".

The DHCOG debacle was only the most prominent recent example of how once-cordial relationships between ratings agencies and the region's companies have become strained during the global downturn. The agencies have downgraded dozens of companies across the Gulf in recent months and put many more on watch for possible downgrades because of the economic turmoil, intensifying brewing dissatisfaction. In some cases, such as DHCOG's, ratings have been removed amid disputes.

The downgrades and disputes have arisen largely because ratings agencies revised assumptions of support from the Government for state-owned companies. Those assumptions changed in a major way after Dubai World's debt standstill announcement late last year. Dubai World, the Government group that owns the property developer Nakheel, said on November 25 that it would seek to delay repaying US$26 billion (Dh95.49bn) of debt and work towards a restructuring with creditors amid a slowdown in Dubai's property market.

For the agencies, the Dubai World announcement was a watershed moment. Ratings agencies gauge the risk of default on debt, and they had long assumed that Gulf governments would quickly come to the rescue if any of their companies were unable to repay loans. That often boosted ratings well above what they would have been without an implicit government guarantee. But the debt renegotiation at Dubai World destroyed all that.

"Since then the focus has changed from analysing the company with government support factored in to analysing it on a standalone basis, which means the level of information we need from a company has changed," a source at one of the agencies says, declining to be identified. A quick succession of downgrades followed, including of Emirates NBD, Mashreqbank and Dubai Islamic Bank in December by Moody's Investors Service, another large ratings agency. The agencies even started to look askance at Abu Dhabi, which has extended $20bn of financing to help Dubai Government-owned companies weather the downturn.

Even before problems surfaced at Dubai World, however, the ratings agencies had been embroiled in several disputes in the region, some of which led to ratings withdrawals. S&P's ratings of the Abu Dhabi National Energy Company, known as Taqa, for instance, were withdrawn at the company's request last July after an earlier revision of rules on rating government companies. Moody's stopped rating Emirates Aluminium last summer for vague "business reasons". And Fitch Ratings pulled its ratings of Hamriyah Free Zone in Sharjah in December, citing a lack of information.

There have been numerous other withdrawals, but the process has been a quiet one, insiders say. The ratings agencies have no interest in publicising disputes with companies they cover, and the companies themselves do not want to be seen as unco-operative. The latest entry in the rash of disputes exemplifies the quietness with which ratings disputes have played out in the public sphere. It came late last month, when Emirates NBD, the country's largest bank, said it would cease being rated by S&P. The logic, Emirates NBD said, was that the merger between Emirates International Bank and National Bank of Dubai that created Emirates NBD had been finalised, thus eliminating the need for S&P's individual ratings of the two entities.

The real story, sources told The National, was more complex. S&P may have been dropped because Emirates NBD was dissatisfied that its ratings were lower than those given by the other agencies, one source says. The bank was also unhappy about S&P's limited presence in the region, a banker at Emirates NBD said. S&P has large offices in the Dubai International Financial Centre, but some of the analysts who cover the region are based in Europe.

"It is not a formality related to the merger as the new merged entity is rated by the other rating agencies: Moody's, Capital Intelligence and Fitch," one banking analyst based in Dubai said, asking not to be named. "It may be that the bank feels that the three rating agencies are adequate and in a better position to rate them. "Still, it leaves us with the question of why they should drop S&P." Whatever the reasons behind the downgrades and withdrawals, analysts at the agencies say their jobs have become harder since the downturn. They are walking a thin line, some say, worried on the one hand that they will be perceived by outsiders as weak if they continue to rate companies that are not giving them full financial information, but also concerned that they could lose business here if they take a hard line and make excessive demands.

Ratings withdrawals are uncommon in the developed world, analysts say, and disputes almost never crop up, although the stakes are high. Ratings directly affect the interest rates companies and governments have to pay on their borrowings; with an excellent rating, banks and investors assume only a slim risk of default and are therefore willing to lend at lower rates. In the Gulf, though, many companies, especially firms that enjoyed the assumption of government support, grew used to being treated by agencies as sure bets. As ratings firms adapt in the wake of the downturn, these companies are being asked to do something they have not done in years: open up their books.

"In general terms, transparency and reporting in the GCC are below international standards," says Bashar al Natoor, an analyst at Fitch Ratings. It remains unclear whether that lack of transparency will lead to reductions or removals of the ratings of other companies in the region after S&P's decision on DHCOG and the tussle with Emirates NBD. Like the other agencies, however, Mr al Natoor says, Fitch was continuing to seek additional information about DHCOG, which it has placed on watch for a possible downgrade. "Fitch is maintaining the rating watch negative as it continues to seek clarity from the company on the level of financial support that could be expected from the Dubai Government in case of need," he says. @Email:afitch@thenational.ae

The world's big credit rating agencies are a powerful and controversial force in the global economy. How they rate companies helps determine how much money companies can borrow and the interest rates they must pay. Standard & Poor's S&P brands itself as a provider of market intelligence, offering stock indexes, research, data and credit ratings. The company dates back to the 1860s, when Henry Varnum Poor founded what was to become Standard & Poor's following a merger with Standard Statistics several decades later. Today, more than US$1.7 trillion (Dh6.24tn) of assets are invested in line with its popular indexes, and the company rates about $32tn of debt, it says on its website. S&P is based in New York City and is owned by t he publisher McGraw-Hill. Fitch Ratings Started in 1913 by John Knowles Fitch as the Fitch Publishing Company, the agency has grown through a series of mergers into one of the world's largest providers of financial information and analysis. The company has about 725 analysts, and rates 2,300 banks, 1,000 companies, 70 countries and 26,000 cities in the US, a history on its website says. Fitch has headquarters in New York and London. Moody's Investors Service Moody's can trace its origins to a statistical manual on stocks first published in 1900 by John Moody and Company. The manual's popularity eventually led to a change in focus from statistics to analysis, and by the 1970s the company had become one of the world's largest ratings firms. It is based in New York. * the companies' websites