The rating agencies came in for a bit of a rough ride over the course of the global financial crisis, but their enhanced presence in the region and the growth of ratings for GCC entities might still be taken as an indication of the Gulf's internationalisation. That, presumably, is still believed to be a good thing.
Yet, to the extent that foreign funding is sought for local projects, engaging with its providers is required. Even if the intrinsic mechanisms and assumptions of the ratings architecture can be debated, borrowers usually don't dictate the terms of borrowing, and especially not in an environment where the word risk has assumed mammoth proportions.
Sensitivities undoubtedly rose over such matters, notably in the US and Europe. In the Gulf too, the idea of a degree of cultural mismatch as well as material differences might still be in evidence.
When this writer toured the region in the mid-90s as part of a research team conducting due diligence for an international bank, I well remember that whereas most meetings were cordial, one or two had an air of friction, as the hosts felt no need to disclose so much about their implied backing from the state.
Much was to be assumed and left unstipulated. Visiting lenders would struggle to align their findings with Western expectations of hard data and confirmed, formal relationships, while keen to be marketing their wares in a region flush with implicit, resource-based collateral.
It would seem there is still scope today for misaligned views. Still, the experience of having the agencies around has doubtless elicited some measure of change in corporate behaviour.
So what do the rating agencies themselves have to say in this regard?
Stuart Anderson, regional head, Middle East at Standard & Poor's, reaffirms the benchmarking notion in asserting "the ratings we apply to GCC issuers are based on a global rating scale in terms of criteria and methodology, a critical requirement for international investors who need to judge relative credit quality and default risk".
Advantage
In other words, exceptionalism isn't really viable on a continuing basis. But that's to the region's advantage, rather than a drawback, he insists.
"Through ratings, regional corporates have been able to diversify funding sources and debt maturity profiles. For example, Majid Al Futtaim's rated sukuk issuance in February this year may be regarded as an important transaction for a private group that has transitioned successfully in terms of corporate governance, disclosure and financial management."
Jay Leitner, Fitch Ratings's Head of Business and Relationship Management for the Middle East and Sub-Saharan Africa region, confirms the sense of an upward trend. "During the last four years our ratings coverage in the Middle East has increased by 21 per cent, driven primarily by demand from the non-financial corporate sector, where coverage has grown 58 per cent. Despite the global financial crisis and the Gulf's own business cycle, there is strong demand for Middle East ratings from investors around the globe."
Moreover, local interest is trickling down, it seems, enhancing transparency and discipline. Whilst the larger corporate players were always aware of the implications of [seeking] a rating, "we are now also seeing an increase in both communication and good practice from medium-size companies too," he says.
David Staples, Managing Director of EMEA (Europe, the Middle East and Africa) Corporate Ratings at Moody's, Dubai draws another distinction, between two diverging paths.
"The GCC corporates whose ratings have remained broadly stable are those characterised by (i) strong linkages to sovereigns from both a strategic policy and ownership perspective; (ii) strong financial profiles and substantial financial flexibility; and where (iii) the willingness by the sovereign to provide ongoing operational financial policy support as well as potentially extraordinary support remains unquestioned."
Corporates
He cites the state-owned corporates in Qatar, Abu Dhabi and Saudi Arabia — specifically those involved in the utilities, telecoms & infrastructure, and industrial & strategic investment holding sectors.
In the other category, there has been meaningful downward pressure on ratings among certain private firms, "in particular those that are more directly exposed to local, regional and global macroeconomic developments and that have experienced substantial volatility and declines in asset valuations".
So the business may be evolving for the better, but there remains an underlying belief as to the ultimate source of creditworthiness in the Gulf.
Positive note: Ratings upturn
It's a reflection of the attention given to rating requirements and the improving business condition locally that corporate entities that have addressed their weaker liquidity profiles and refinancing exposures have seen upgrades over the past year.
Developments in corporate ratings in Dubai are a particularly relevant example, according to David Staples, Managing Director of EMEA Corporate Ratings at Moody's.
By way of illustration, he refers selectively to DP World, Emaar Properties, Dubai Electricity and Water Authority (Dewa) and Dubai Holding Commercial Operations Group, upgraded by the agency in turn between April 2011 and January 2012, and each now with stable outlooks.
