A ll in all the worst is over. We are unlikely to see the magnitude of rating action of 2009, Philipp Lotter, Senior Vice-President, Moody's Middle East, told Emirates Business. "In fact, most of the companies that we rate are good as regards transparency," he said. However, transparency still needs to be improved but that is not a Gulf-specific issue. Parts of Europe were not transparent some years back. That comes with the gradual development in the market, he added.
So there are chances that some ratings may face downgrades in the near term because of the economic circumstances. Abu Dhabi government-related entities are also under review for downgrades. "There is a chance that some or all those ratings may face downgrades over the near term," he said. "What we are looking in Abu Dhabi is the willingness and not the ability to support."
Further explaining the aim of a credit rating exercise, Lotter said: "The objective is fairly unemotional. If you have a couple of 'AA' and 'A' ratings, you are not giving investors a choice as to how they want to structure their portfolio."
Is the region nascent in terms of understanding investment and non-investment credit ratings?
Yes it is. We assigned our first corporate rating in 2005. It's an incredibly young market and all the new ratings tend to be the flagship names, which have higher ratings. Like any new market, there is this expectation that the higher, the better. But as the market develops, maturity filters in to the market. A credit rating is not a measure of good and bad; it is purely a measure of a company's ability to repay and service debts on time. There are companies who by nature of their policy are in a more risky credit proposition than a company that is a utility or government owned. The objective is fairly unemotional and that is to introduce a balance sheet policy that is best for the business and that can be done is a Ba2 as much as an A2.
The mere fact that non-investment grades are also called junk gives a perception it is a useless piece of paper…
I don't use the word junk. It's wrong. It gives a connotation that isn't right. It is junk if it is high risk and low return. If it is high risk and high return, it is not junk.
You've recently assigned non-investment ratings to three GCC entities – Saudi's Dar Ar Alkaan, Oman's Al Omaniya Financial Services and Saudi ORIX Leasing Company.
Is this a sign of gradual maturity?
Yes, definitely. There is certainly a sign the rating universe is expanding and also the interests of investors. If you only have a couple of double 'A' and single 'A' rating, you are not giving investors a choice as to how they would want to structure their portfolio. But if your offering includes high investment grade to high yield, then you are offering choice and that is a sign of a deeper and broader market, which is a requisite to a matured market.
The region has received criticism due to alleged lack of transparency. What's your take on that issue?
Most of the companies that we rate are good as regards transparency. During the crisis some have gone back into their shell rather than come out of it. Where regular information could have been more conducive to responding to rumours and to misrepresentations, which have occurred. Transparency still needs to be improved but that is not a Gulf-specific issue. Parts of Europe some years ago were not transparent. That comes with the gradual development in the market.
Do you expect to see more downgrades this year?
All in all, the credit environment in the Gulf in global comparison is less severe. We also have Abu Dhabi government related entities under review. So there is a chance that some or all those ratings may face downgrades over the near term as we go through this review. Dubai ratings, which come down over the last six months are also under review. But all in all, the worst is over. We're unlikely to see the magnitude of rating action in 2009.
When will you finalise the reviews?
We want to resolve Abu Dhabi review by the end of the quarter. Dubai is a little flexible because the review is dependent on variables that we can't influence.
So what are the possible reasons for downgrades of Abu Dhabi companies?
What we're trying to understand is whether the implicit government support factoring into these ratings are still appropriate. These ratings aren't going down by a multitude of notches. We will evaluate whether we need moderate distinction between the corporates and governments. That not withstanding, Abu Dhabi is highly liquid and very wealthy.
What are the major factors to consider a downgrade?
One is the absence of explicit guarantee. A company that does not have explicit guarantee from the government must not normally have its rating at a government level. There are exception where firms have agency-like function – whether they execute government policy or are tied to government budget and funding on an ongoing basis. We are going through the names in Abu Dhabi and are discussing with the government – and evaluating which ones fulfil these criteria and could maintain government rating despite the absence of explicit guarantee. We need to know which ones are stand-alone entities. What we are looking at is Abu Dhabi's willingness and not the ability to support.
How do you measure willingness?
That is the difficult question because at the end of the day we form an opinion – we try to get as much information as we can. We speak to key decision makers and governments. And then we sit together in a rating committee.
PROFILE: Philipp Lotter Senior Vice-President, Moody's Middle East
Prior to his current role, he was vice-president – senior credit officer at Moody's Investors Service, where he was in charge of marketing and execution of rating advisory mandates for a wide range of companies across Europe, including both first-time ratings and M&A-related debt advisory and restructuring projects, as part of Citigroup's Debt Capital Markets function. From August 1993 to November 2000, he was senior advisor/manager at Dresdner Kleinwort. He was responsible for building up Dresdner's new rating advisory team in Frankfurt.
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