Gulf firms send S&P packing despite new GCC specific scale
Standard and Poor's (S&P) in February launched a new credit ratings scale dedicated to the Gulf Cooperation Council countries, in an effort to provide "finer distinctions of credit quality."
The scale is based on local currency funding, including debt capital markets, project finance debt, bank loans and Islamic products. Global credit ratings will continue to be available for GCC countries, but Rob Richards, criteria officer at S&P said that the Gulf region easily lent itself to a dedicated scale.
"By the success of a lot of the other local scales, we've found that there is an appetite for scales that are more granular and provide a basis for making finer distinctions than the global scale does in the defined market where people are focused," said Richards. "Our judgment was that the GCC was a good market to offer a regional scale in... It's one of the world's natural regional markets."
The ratings on the GCC scale will take a closer look at the intricacies of the local markets in the gulf and, according to S&P staff, provide more nuanced ratings, taking into account for example, issues stemming from restricted access to foreign currency in the repaying of obligations.
"S&P started developing the GCC regional scale in early 2008, when local currency debt issuance was quite high," said S&P's Middle East Regional Manager Jan Willem Plantagie, in a press release. "We expect a resurgence in local currency issuance over the coming years, driven by large financing needs for infrastructure development, stronger competition for funds in the GCC and government initiatives to stimulate local bond markets, such as those being undertaken in Saudi Arabia," he said.
This is Standard and Poor's second region-specific scale, following the launch of the Association of South East Asian Nations ratings scale. Ratings on this scale will use the prefix "gc."
Losing faith
Despite this focus of attention on the specifics of doing business in the Gulf, S&P and international credit ratings agencies as a group, have received harsh criticism from the GGC, both in the form of rhetoric and withdrawals from service.
Two prominent Dubai institutions announced that they would be ceasing to use the services of Standard and Poor's in late January. Emirates NBD and Dubai Holding Commercial Operations Group both dropped the agency with the latter stating that S&P had a "lack of understanding of the business, its operations and relationship with the government of Dubai."
One week before, Dubai Holding was downgraded to a "B" rating. At the same time, Emirates NBD's rating was also dropped from "A-" to "BBB" due to exposure to Dubai's struggling government-owned entities.
Emirates NBD stated that it would be keeping its relationships with agencies "who have a presence of long-standing coverage of the UAE." The bank continues to work with Capital Intelligence, Fitch Ratings and Moody's.
Emirates NBD and Dubai Holding were the most recent of six institutions to have withdrawn from Standard and Poor's in 2009. Three other institutions suspended services with the other two big players, Moody's and Fitch Ratings, in 2009, possibly demonstrating a loss of faith in the ability of international ratings agencies to accurately assess the quality of investments and institutions in the Gulf. In some cases, bias against the Gulf has been suggested.
"Leading international business and financial institutions, such as international ratings agencies, have adopted double standards in an attempt to direct investments into their own markets," said United Arab Emirates economic expert Mohammed al-Asoomi in an editorial in Gulf News. "Continuous manipulations of international ratings agencies of their evaluations and dealing with double standards will make them lose their credibility in the region, which is happening right now," he wrote.
A ratings agency analyst, who declined to be named, said that S&P's lack of official presence in the region was harming its credibility with Gulf businesses.
"S&P aren't based in the region, they do have an office here but they don't have any bank analysts here, which I think was another sticking point with them," said the analyst. "You do benefit from being here and picking up what is going on more quickly then you do in London, but it shouldn't be a deal-breaker on its own."
Weakening the case against S&P, the withdrawals tend to follow ratings downgrades, suggesting to some that banks and corporations simply withdraw from agencies that rate them unfavorably.
"There certainly is a lack of understanding in [the GCC] about what ratings are for. We've seen comments in the local press here that have been quite critical," said the same analyst.
Though S&P has some ground to recover in the Gulf, Richards held that the GCC scale was not a response to the recent client withdrawals, as the new scale has been in the works since 2008.
"There's no real ideal, or right time to introduce a regional or national scale," said Richards. "It wasn't a reaction to recent rating withdrawals or criticism."
Mistrust of the entire ratings industry came to a head in 2009 when Standard and Poor's, Fitch Ratings and Moody's were accused of granting inaccurately high ratings to the mortgage-backed securities that led the United States housing bubble to burst, causing a global ripple-effect.
"In good times we're going to be told that we're an anachronism and unnecessary. If we've made a high profile mistake its going to dent our reputation, but we just keep trying to work to make the ratings as accurate as we can," said Richards, adding: "Most people who criticize particular ratings don't realize that in 2007, 2008, the single B rating was the most common corporate rating that we assigned. During those times when the spreads were far narrower compared with typical historic spreads, we were warning that there was still a considerable level of risk in those bonds."
Richards was unaware of how many institutions had requested mandates with the new GCC scale, but he said S&P has high hopes for the scale's success.
He said, "We hope that the GCC scale is going to help investors and issuers in the Gulf put credit risk in context. It will always be a challenge to gain acceptance of ratings when many companies think they should be rated among the best in the market."
Moody's and Booz & Company declined the opportunity to comment.
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