Business | Banking
Taqa-S&P split just the beginning
Abu Dhabi Energy Company's (Taqa) announcement on Wednesday that it is terminating its ties with Standard & Poor's (S&P) credit rating agency may be the latest sign of volatile economic times, but it is unlikely to be the last.
- By Ahmed A. Namatalla, Staff Reporter
- Published: 22:48 July 2, 2009
- The Standard & Poor's headquarters in New York. S&P has issued revised criteria for measuring the credit-worthiness of government-related entities, thus affecting some 500 companies worldwide with part or full government ownership.
- Image Credit: Bloomberg News
Abu Dhabi: Abu Dhabi Energy Company's (Taqa) announcement on Wednesday that it is terminating its ties with Standard & Poor's (S&P) credit rating agency may be the latest sign of volatile economic times, but it is unlikely to be the last.
According to analysts, the Taqa conflict represents a growing gap between companies and credit rating agencies as the latter face increasing pressures from governments worldwide after taking most of the blame for the economic downturn.
In late April, for example, the European Union approved new regulations requiring the implementation of new transparency measures, the appointment of independent directors and banning the agencies from providing advisory services.
"[With ratings] companies can access funds at a cheaper rate," Tariq Qaqish, fund manager at the Dubai-based Al Mal Capital, said.
"However some analysts and companies think these agencies are a little bit behind the curve. They're not signalling the risk ahead of time. Their reports tend to fall behind."
In the Middle East, part of the problem is simply the relatively low level of representation, Qaqish said. "There are only a few accredited companies in the world. But they need to enhance their existence in this region so they are closer to the realities on the ground."
Last Monday, S&P issued revised criteria for measuring the credit worthiness of government-related entities (GRE) affecting some 500 companies world-wide with part or full government ownership.
S&P estimated 10 to 20 per cent of the companies worldwide would be affected, which included Taqa as the only affected company in UAE.
This week, the agency downgraded several Dubai-based GREs including DP World, Jebel Ali Free Zone, and the Dubai Multi Commodities Centre Authority, though for reasons unrelated to the criteria change.
The new criteria place more emphasis on each company's stand-alone credit profile (SACP) and subject the relationship between the GRE and the government to more scrutiny.
In Taqa's case, this implied an almost imminent "multiple-notch downgrade," according to a S&P statement.
"Under the new criteria, if you have a weak SACP, then that would reflect on your ratings as a company," Farouk Soussa, S&P head of Middle East government ratings, said.
Taqa objected to the implementation of new criteria and decided to cut ties with S&P.
"The underlying fundamentals of our business have not changed," Taqa CEO Peter Barker-Homek said. "We have strong ties to the Government of Abu Dhabi through both ownership and the membership of our board of directors; the implicit support of the government is unchanged and has consistently been confirmed in both word and deed."
Since the majority of Taqa's assets are held outside the UAE and its role was not judged by S&P to be "absolutely critical" to the economy under the revised criteria, the company's SACP was unlikely going to keep it at the 'AA-' rating last confirmed by S&P in May.
Taqa maintains a Moody's rating of 'Aa2', just two notches below the agencies highest rating.
Although Moody's has not announced similar changes to those of S&P's, the company says it will continue to examine the relationships between GREs and their governments as a main criteria for its ratings.
"We have no plans to change our criteria," Philipp Lotter, Moody's Middle East Senior Vice-President. "But our application of criteria is always under constant monitoring. If we feel in a certain country that the supportive environment of the government has deteriorated, then we would have to reflect that on the rating."
Soussa said: "The changes are a natural consequence. [They are] a response to the weaknesses that we felt we had in the past and ensure the criteria reflect a changing environment. Regulation has increased so our activities are much more closely supervised by the outside world.".
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