Showing posts with label Ratings. Show all posts
Showing posts with label Ratings. Show all posts

Monday 11 October 2010

SICO Bahrain: Dubai Debt Problems Just Deferred Until 2014?


SICO Bahrain has issued a new report, "Dubai Debt Concerns Deferred to 2014".  SICO Research is only available to registered users so you'll have to sign up to read the report in detail.

Here are some highlights.  Themes that might already be familiar and some not.
  1. Forgetfulness of investors in limelight.  Some history on the trends in CDS spread differentials between Dubai and Abu Dhabi (180 bps in October 2009 to 480 bps in early December and then again to similar levels around the Greek crisis).
  2. Recent US$1.25 billion issue not sufficient to plug the 2010 deficit (estimated at US$1.6 billion).  Plans to slash subsidies and other transfers by 64%, though wages to increase by nearly 20% as the Government needs to make room for more nationals entering the workforce.
  3. Repayment schedule remains a challenge.  SICO estimates very modest debt repayments in 2011 and 2012.  For the period 2013 - 2015 excluding bilateral, the estimates are US$1.7 billion in 2013,   US$19.23 billion in 2014 and US$0.5 billion in 2015.   So a definite debt hump in 2014 - and the reason for the title to SICO's article.
  4. Economic recovery may not improve Government revenues.  Trade and tourism not expected to generate significant large government revenues.
  5. Not many options to improve finances.  Taxes a possibility but pose competitive disadvantage vis-a-vis other GCC states.
  6. Sale of assets a possibility.  SICO believes the Government may take the strategy of selling partial stakes to raise cash rather than relinquish control of strategic assets.
  7. Dubai increasingly "leveraging" the UAE brand.  Apparently in the prospectus for the recent bond, a great deal was made of the fact that the UAE has a AA sovereign rating.  SICO sees this as a way of diverting attention from Dubai's 395 bps CDS roughly 296 bps higher than Abu Dhabi.  In my opinion it may also be a way of reminding investors of Abu Dhabi's deep pockets.
  8. Despite the negatives, SICO does not believe a sovereign default is likely.  It seems to me that the major issue here is one of pricing of credit as well as lenders and investors being careful about the quantum they commit to the Emirate.

Monday 27 September 2010

Commercial Bank of Kuwait Terminates S&P Ratings


On 23 September, S&P announced it was withdrawing from rating CBK at the bank's request.  In line with standard operating procedure for rating agencies, S&P gave a final rating.
S&P affirmed its 'BBB/A-2' long- and short-term counterparty credit ratings on Commercial Bank of Kuwait
(CBK) with a stable outlook. 
The rating agency said it had bumped up CBK's rating by one notch to reflect that it was a systemically important bank and that the likelihood of government support was high. 

Then it went on to say that it estimated CBK's distressed loans at 20% of the total loan portfolio.  And that provisioning needs are likely to weigh heavily on the bank in the next two years.  

It's clear from that language that CBK is not providing current data.  Either the deterioration in the loan portfolio is sudden or S&P just got an inkling.  In any case, not a sign of the sort of candor one would expect between issuer and rating agency.

I suspect the ongoing problems in the loan portfolio and S&P's likely future focus on them were the reason for the bank's "excusing" the agency from further rating duties.

Some thoughts:
  1. CBK is not alone in its aggressive business posture.  This suggests that other banks may be experiencing increases in their distressed loans.  CBK as the proverbial canary in the coal mine.  The banking system had just under 10% at FYE 2009 - already a distressed scenario.  
  2. This a rather short-sighted though common reaction.  Shoot the messenger for delivering bad news.  Pretend that everything is OK. The problem is that CBK's loan portfolio will not recover miraculously.  Future earnings statements will reflect the provisions.  And the fiscal year end report will reflect the percentage of distressed loans.  Frankly, this just looks bush league.  
  3. In addition,  Fitch and Capital Intelligence rate CBK as well - and both have downgraded the bank earlier.   If distress continues, they are likely to do so again. And this leaves CBK then in the distinguished company of Dubai Inc.  Perhaps, not exactly the sort they should be palling around with at present.

Thursday 5 August 2010

Aldar Properties - S&P Lowers Rating to "Junk"

S&P has lowered Aldar's ratings to BB- from A-.   That's a more than one step change! Outlook is negative.  So S&P's message is a significant negative.
"We understand that despite relatively sound overall supply demand fundamentals in the Abu Dhabi property  market," added Mr. Trask, "Aldar has been significantly affected by spill-over effects from the heavily oversupplied Dubai real estate market, characterized by significant declines in rental and market values."

This is having a negative effect on both the demand for, and the price achieved by, Aldar for the sale of real estate in Abu Dhabi.  Based on the pipeline of new supply both in Abu Dhabi and Dubai, we do not anticipate a reversal of this situation anytime soon. 
Two items worthy of comment:
  1. The last sentence "We do not anticipate a reversal of this situation anytime soon."   S&P's ratings action also reflected a revision of their assumption re likely government support.
  2. Ascription of Aldar's problems to the "spillover" from Dubai.
 On the negative outlook.
We are also assigning a negative outlook, which reflects our view regarding Aldar's future  profitability and cash flow generation in light of the challenging market conditions.

Wednesday 28 July 2010

AlGosaibi v Maan AlSanea - English Court Rules Saad to Pay ADCB US$33.1 Million


Asa Fitch over at The National reports that an English Court has ruled in favor of ADCB ordering Saad Trading Contracting and Financial Services to pay ADCB US$33.1 million for a defaulted foreign exchange swap.  The default was triggered by a decline (withdrawal) of STFCS' rating last year June.

Saad does have the right of appeal.

And of course obtaining a court decision in one's favor and obtaining the cash are two different things. 

Thursday 22 July 2010

What Were They Thinking?: Bharti Airtel US$7.5 Million Loan - "Sour" Skim


You'll recall that Bharti Airtel secured a US$7.5 billion loan last March to fund its purchase of African assets from Zain Kuwait.  Original pricing on this 4.7 average year life loan was 195 basis points with a 20 basis point up front fee.

Subsequent to granting of the loan, S&P reduced Bharti's credit rating from BBB- (investment grade) to BB+ (non investment grade).  It seems now that the lead arrangers have a bit of problem.  Their hoped for skim on the loan has gone sour.  Rather than being able to sell the loan at say 190 basis points margin, the lead arrangers are reportedly finding that the "market" is demanding around 250 basis points.  

I've seen comments that suggest the mark to market would be on the order of US$40 million to 42 million.  Without the exact amortization schedule, it's not practical to calculate.   BofA is reportedly going to mark.

Funny thing is, when the lead arrangers were pricing the deal, S&P put the Company on ratings watch for a possible downgrade.  One would have thought (at least this one) that perhaps the pricing would have been linked to the rating.  Apparently not.

The frenzy with which the loan was bid may be a leading indicator of the end of the banking recession and the return to "happy days".  Though the sour skim may be a contrary sign.

Lead Managers and their reported shares are:
  1. Stan Chart US$1.3 billion
  2. Barclays: US$0.9 billion
  3. ANZ, BNP, BofA, Credit Agricole, DBS, Bank of Tokyo Mitsubishi, Sumitomo Mitsui:  US$0.8 billion.
(There's apparently a bit of rounding in the above numbers).

Sunday 11 July 2010

Bahrain Islamic Bank - Trouble on the Horizon?



Today an apparently rather "pleased" as well as "satisfied" BIsB announced that:
BisB has taken the option of enhancing its financial position, by increasing its provisions mainly due its investment portfolio, rather than announcing profits for its mid–year results.
AA:  Should the reader interpret this to mean that contrary to IFRS, AAOIFI "FAS" allow a reporting entity full discretion to take provisions even when they are not really needed?  Perhaps, merely as "a precautionary step against any market changes, and in line with the Bank's conservative policy in this regard."  No deterioration in the portfolio here.  Move along.  It's pretty much in line with 2009 when the Bank appropriated "precautionary provisions" as "a conseqeunce to the International Financial and Economic condition".

By the way if you're wondering BIsB "has registered non-cash losses to the tune of BD 5.7 million for the first half of the current year."  In 1Q10 it had a small profit of BD1.2 million. 2Q10 Financials here.

We also learned that:
The Board of Directors agreed to increase the paid-up capital of the Bank by up to 75 % by issuing new shares with at its nominal share price issue of 100 Fils per share.
And that:
Mr. Khalid Abdulla Al-Bassam went on to confirm the Bank’s strong financial position and its satisfactory liquidity status and reiterated that the Bank needs the new injection of cash to finance the growth requirements in its business activities.
AA:  Apparently a rather sudden decision on an expansion strategy.  You'll recall that no capital increase was presented at the 16 March 2010 Annual General Meeting for 2009.   Perhaps like AA you're  also wondering where BIsB is going to grow by 75% particularly in this market.  Though perhaps a part of the capital increase will go to cover the BD35 million deduction from regulatory capital for the "excess amount over maximum permitted large exposure limit".  That and 2009's BD20 million loss were the primary cause of the approximate halving of the CAR.  (Note 16 2009 Audited Financials).

It's also a bit surprising that a successful institution like BIsB is offering its shares at par BD0.100 - when it trades at BD0.159 per share and its book value per share is BD0.183.  Though I suppose one might note that roughly a year ago the Bank traded for BD0.264.  And that its order book is one-sided with more than 100,000 shares on "offer" - roughly 14 x the last traded volume.  Market data here.

There would appear be more here than meets the eye at first glance.
  1. Clearly, BIsB - which is well known for its focus on the real estate sector (not only for lending but also for  proprietary investment  in construction and development companies -- has some issues with its portfolio.    
  2. It needs provisions.
  3. It needs additional capital.  Hence the Rights Offering at par.
  4. That being said, Moody's ratings on the Bank remain the same as they did in March 2010 a respectable Baa1..

Friday 9 July 2010

DIFC Investments Downgraded with Outlook Negative


8 July 2010 - Approximately US$1.25 billion in debt affected

Moody's Investors Service has today downgraded to B3 from B2 the senior unsecured issuer and debt ratings of DIFC Investments LLC ("DIFCI" or "the Group") and Dubai Sukuk Centre Ltd. At the same time, Moody's has converted DIFCI's B3 issuer rating into a B3 corporate family rating (CFR) and assigned a probability of default rating (PDR) of B3, in line with the rating agency's practice for corporate issuers with non-investment-grade ratings. The outlook on all ratings is negative.

Moody's says that DIFCI's downgrade to B3 reflects the Group's highly leveraged financial profile, its expected heavy reliance on asset disposals in the coming 12-24 months in order to build sufficient liquidity to meet maturing debt obligations, and its continued negative free cash flow generation. While recognising management's intention to refocus the business, reduce costs and dispose of non-core assets, Moody's points out the risk that these measures may be insufficient to ensure that the Group has available funds to meet its maturing financial obligations as they become due over the next two to three years. The downgrade to B3 also factors in the negative impact that challenging conditions in the Dubai real estate market continue to have on DIFCI's financial profile. In 2009, the company recorded significant impairments in its real estate portfolio, which, combined with write-downs in its broader asset portfolio, contributed to a full-year loss from continuing operations of USD480 million. 
 More bad news for the Emirate.   And a commentary on market conditions. 

Wednesday 7 July 2010

Gulf Finance House - Press Release on S&P Downgrade


Pass the smelling salts!

There it was today an announcement on the BSE.  None so far on the DFM or on the KSE - but it's still early in the day only 08:12 EDT here.  And Dubai and Kuwait are a lot further from GFH's HQ in Manama than the BSE.  

Oh, wait, I see.  

GFH is responding to a letter from the BSE asking about the downgrade. 

According to the press release, GFH's Board decided last week to terminate the ratings relationship but to allow Executive Management the discretion as to when to terminate.  

The press release clarifies:
"In the meantime the Executive management would like to focus on the recovery plan and the restructuring then will decide to implement the withdrawal".

Since GFH seems to have decided to implement the withdrawal on or before  the day the rating was released, less charitable souls than AA might infer some lack of communication within the firm about critical events.  

Perhaps, certain information is shared on a "need to know" basis.  As with the shareholders?  A key issue may be in the determination of "need".  

As always AA stands ready to provide a public service.  

Here's the link to the Central Bank of Bahrain's Capital Markets Regulation "Disclosure Standards".   The appropriate "chapter and verse" is Article 32 "Ongoing Obligations Immediate Disclosure".    It does quite a nice job of defining "need to know". And the timing of "letting them know".

Thursday 1 July 2010

Moody's Downgrades DHCOG


Asa Fitch at The National has an article on Moody's recent downgrade of DHCOG.

"The credit ratings agency downgraded Dubai Holding Commercial Operations Group (DHCOG) by one notch on its rating scale to “B2” from “B1”and kept it on review for another drop. DHCOG, which has large holdings in the hospitality, business parks and property sectors, was unavailable for comment. The group was downgraded to “B1” last December, a rating already considered below investment grade."
You'll recall that last January, Dubai Holding had excoriated S&P for its:
  1. manifest "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
  2. "inaccurate statements coupled with factual errors that are misleading."  
While it may be unclear to some if Moody's is suffering from the same affliction or if S&P was indeed right after all, there's no confusion here at Suq Al Mal.

Monday 22 March 2010

Adeem v Gulf Finance House: Comeback "Win" for GFH

Today the race is finally over.  

While the IT Team at Adeem Investments put up an  incredible fight, at the last moment the GFH Team lapped them.

Yes, in less than 115 days, GFH updated its website for several S&P rating downgrades and one upgrade.

Many commentators out there, including Abu Arqala, credit GFH will an innovative strategy which literally helped them lap Adeem several times.  Instead of going through each of S&P's downgrades and its one upgrade in sequence, GFH jumped to the last ratings action (an upgrade from SD to CCC-).

It's that sort of bold decisive action that has earned GFH the well deserved name it has in the market as well as reconfirming yet again (as if that were really needed) the validity of their business model and the unshakable faith and support of the market ....

This blog tried to contact the Adeem Team to get their reactions to this dramatic defeat, but since their website is still being upgraded to serve all of us better, sadly we were unable to make contact.

Thursday 18 February 2010

Fitch Downgrades Dubai Holdings Commercial Operations Group


You'll remember a while back there was quite a "war of words" between S&P and DCHOG when S&P downgraded them to B.   Among one of the countercharges levied by DCHOG was that S&P really didn't understand what it was doing.  That it had a  "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai."

Yesterday Fitch weighed in with a downgrade to B+ - marginally higher than S&P's,  However, their comments will give cold comfort to DCHOG.
  1. The rating action reflects Fitch's amended rating approach for DHCOG. The agency now rates DHCOG on a standalone basis rather than a top down parent and subsidiary basis. This is due to a continuing lack of substantive information on the government's ability to support the group in case of need.
  2. DHCOG is on ratings watch negative.  The resolution of the RWN could result in a downgrade of DHCOG's ratings by more than one notch.  
  3. A resolution of the RWN will be contingent upon the receipt of DHCOG's audited 2009 annual accounts, confirming the group's ongoing ability to generate cash flow, retain adequate liquidity and avoid a potential covenant breach at the December 2009 test date. The removal of the rating watch will also be contingent upon DHCOG successfully refinancing the upcoming July 2010 facility, or obtaining additional government funds to repay the facility.
In terms of the basic standalone credit analysis, the two rating agencies are in broad agreement.  The difference between their two ratings is immaterial.

DHCOG can take comfort from the fact that there is no harsh criticism about information flow and adequacy of documentation.  Otherwise Fitch seems to be pretty much on the same page as S&P.  And as well perhaps from Fitch's apparent willingness to factor in government support.  It's question mark seems to be "ability" not "willingness".

Monday 15 February 2010

When the Ratings Get Tough, the Tough Change the Ratings Standards: S&P Announces A New Ratings System for the GCC


As we are informed by The National, Standard and Poor’s (S&P) yesterday launched a regional credit-ratings system through which companies in the Gulf will be judged against each other, instead of against their global peers.
Officials at S&P said the regional ratings will generally be higher than their ratings on a global scale.
Don't measure up to Global Standards?

No problem, try our new GCC "meter stick".  At just 500 mm long, you're suddenly twice as tall.

And with all great ideas, there are many applications.
  1. Criticized by Lord Peter and Deputy Neal about your transparency?  Remind them that on a regional scale your transparency certainly beats that of some other countries in the area.
  2. Your stock not doing so well since you announced that US$700+ million loss?  Inform your shareholders that you're beating the performance of Enron and Lehman Brothers shares.
  3. Smart aleck boggers attacking your business model?  Remind AA that you're innovative business model has held up quite nicely when compared to those of The Investment Dar or The International Banking Corporation.
  4. Distressed about a Turkish coffee stain?  Recall that your spouse's former roommate once washed the oil filter and pan from his car in the kitchen sink.

Central Bank of Bahrain Proposal To Tighten Limits on Large Credit Exposures


On the theory that regulators often craft regulations to deal with problems that have emerged, the 11 February Consultation Paper by the CBB on "Large Exposures"  indicates the Bahraini authorities' concerns with related party exposures.

The CBB's proposals are for the following.  As indicated these revisions have not yet been implemented but are being discussed with banks in Bahrain.
  1. Loan and security underwriting where a strict 30% of capital rule is to be applied.  Amounts over this limit will not be allowed.  After an up to 90 day underwriting period, any remaining amounts will be subject to the normal large exposure limits, including the requirement to deduct from capital any amount over 15% of capital.   This underwriting limit is not available for transactions with connected counterparties.
  2.  A new rule that limits placement of investments with clients or securitization of such assets to 25% of capital again for up to a 90 day period.  A Board approved written due diligence and procedures policy for such transactions must be in place to be eligible for this limit.
  3. A reduction in the aggregate exposure limit for a Conventional Bank's exposure to both directors and associated companies and unconsolidated subsidiaries to 25% from 40%  (currently it's 20% each thus equalling 40%).  As well as a reduction in all exposure to connected counterparties (including management) from 40% to 25% of the bank's consolidated capital base.
  4. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet exposure to directors to 10% from 15% and establishment of a new separate limit of 15% for  associated companies and unconsolidated subsidiaries.  Previously the limit for both categoties taken together was a total of 15%.   And the aggregate limit for all connected counterparties is proposed to be reduced to 25%  (This mirrors the limits on Conventional Banks).
  5. A reduction in the aggregate exposure limits for an "Islamic Bank's" off balance sheet exposures to an individual connected counterparty funded by client Restricted Investment Accounts  to 15% of the RIAs and in aggregate to all connected counterparites to 25% instead of 35% of the bank's consolidated capital base.
  6. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet and off balance sheet exposures (this second category funded by RIAs) to 20% of the bank's consolidated capital base down from 25% and in aggregate to all connected counterparties from 60% to 50%.
Comments.
  1. Clearly, there are problems in Bahrain with connected counterparty exposures as well as banks taking on inordinate "placement" risks with investments.  Serious problems I'd guess.  The CBB is not engaged in this endeavor - which I suspect will raise fierce opposition from both Conventional and Islamic Banks - just for theoretical reasons.
  2. I hadn't realized that an "Islamic Bank" was allowed by the regulations to have such concentrations of risk exposure including RIAs. At first look this seems high. Not sure what I'm missing.
And for those interested the CBB's definition of a  Restricted Investment Account.

    Tuesday 9 February 2010

    USA AAA Rating


    The Treasury Secretary of the United States of America gave an interview with ABC this weekend.  He was asked about Moody's comment that the USA might lose its triple A rating.  He replied.
    “Absolutely not,” Geithner said, when asked in an ABC News interview broadcast yesterday whether a downgrade is a concern. “That will never happen to this country.”
    You notice that Secretary Geithner said "never".

    When one thinks that the laws of gravity (physical or financial) do not apply to one, one is likely to be in for a surprising downfall.

    And that leads into another issue.  Chairman Mao's  observation of the relationship between political power and guns is oft quoted.  Of course, guns cost money. 

    Here's another perhaps cautionary tale from a land on whose Empire the sun never set.  And never would or so we were told.

    Saturday 30 January 2010

    S&P Final Rating on Emirates Bank International and National Bank of Dubai


    Earlier this week, Emirates National Bank NBD announced that it was terminating S&P's rating services.  The market assumption is that this was in response to S&P's downgrade of DHCOG and the rather negative comments S&P made about DHCOG and transparency in the local market.

    Whenever a rating agency stops rating an obligor or an issue, it updates its view on the ratings of that entity so that it leaves the market with an accurate read of its credit opinion.

    Today S&P reaffirmed its ratings of BBB/A-2 (long term and short term respectively) for Emirates Bank International and National Bank of Dubai with negative outlooks on both  At this point both EBI (which was formed from the rescue of several failed or near failed banks in Dubai) and NBD (which was the previous Ruler of Dubai's personal bank and which was run very conservatively but a canny old Scot at one time) have merged to form a new bank, Emirates NBD.  

    The ratings of the two banks benefit substantially (three notches to be precise) based on the assumption that as a systematically important bank, ENBD would receive extraordinary support from the UAE authorities (meaning the Federal Government and the Central Bank of the UAE). Other positive factors were the bank's leading commercial position and its adequate preprovision earnings capacity.  On the negative side were depressed financial conditions in Dubai and high exposure to weakened Dubai government related entities.

    ENBD has some AED 7 billion (US$1.9 billion) of debt maturing in 2010. 

    As of 30 September 2009, the bank had total assets of AED291 billion (US$79.3 billion), equity of AED 32.2 billion (US$8.8 billion) and medium term debt (bonds and syndicated loans) of AED25.7 billion (US$7 billion).  When adjusted for debt payments due in 4Q09, the adjusted medium term debt total is AED23.4 billion (US$6.4 billion). 78% of that amount matures in the period 2010-2012 as follows:  AED7 billion  (US$1.9 billion) in 2010, AED3.5 billion (US$1 billion) in 2012 and AED7.8 (US$ 2.1billion) in 2013.

    Wednesday 27 January 2010

    The Emirate Strikes Back: Emirates Bank NBD Drops S&P




    "What is thy bidding, my master?"
    "There is a great disturbance in the Ratings".
    "I have felt it".
    "We have a new enemy, the rating agency who downgraded DHCOG."

    Here's the press release.  I trust the Death Star is ready.

    Tuesday 26 January 2010

    Another Own Goal for Team Dubai in the S&P/DHCOG Ratings Dispute




    You've probably seen the press articles that Standard and Poor's lowered the rating on DHCOG from BB+ to B.  A weaker cash flow and lack of information are cited as the reasons along with some background on the Emirate and Dubai Inc.  These reports also note that S&P has withdrawn its rating.

    What I want to focus on in this post is the proverbial "war of words" that they have launched.

    Was this war necessary? Who stands to win? Who will be the most damaged?

    As you might guess from the title, I have my own view. Team Dubai has roundly booted yet another one into its own net. And when it comes to scoring, it seems that just about everyone on the Team is capable.  To be clear here I am referring to DHCOG's reaction to the ratings downgrade and withdrawal by S&P.

    Let's start by reviewing each's press release – where better to wage a war of words.

    First, S&P. Their press releases, including rating actions, are password protected (though all you need is an email address and the willingness to give it to them to get access). If you can't or don't want to do that, Bloomberg has a more complete account than many of the reports in the press. 

    S&P states that:
    1. Materially weaker cash flow and a resulting negative impact on liquidity as well as lack of clarity on potential government support (that famous "implicit guarantee" rears its head again) is the basis for the ratings decline. 
    2. Because of "inadequate timeliness of information and insufficient documentation (emphasis mine) to maintain their surveillance" they have decided to cease rating the company.  (You might ask why they didn't just withdraw quietly with no fuss and no downgrade.  It's common practice that a rating agency doesn't simply withdraw without either reaffirming or changing the rating.   This is especially the case if they have negative information and conclusions. Since this will be their last word, to do otherwise might leave the market with the wrong impression of their opinion. As to the fuss, it either came as a reaction to what I expect were rather sharp discussions between the two parties. The other less favorable interpretation is that there are significant shortcomings in the information that S&P cannot let pass without comment.). 
    3. Three further important negatives. First, the rating trend is negative: more erosion in credit quality is expected. Second, the rating and the negative future view reflect their base case. In other words they are not basing their rating and view on the future on the "downside" case. Third, a broad criticism of "lack of market transparency, reliable market data, and the level of financial information" (Ouch).
    Now over to DHCOG's press release.

    Their view is clearly and starkly stated.
    1. They dropped S&P as a rating agency due to S&P's "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
    2. They have been "sharing adequate information frequently and in a transparent manner" with S&P. 
    3. S&P has made "inaccurate statements coupled with factual errors that are misleading." 
    4. Therefore, they "discredit and disagree with the content of the latest S&P report". 
    5. They will continue to work closely with other rating agencies and directly with investors in full transparency".
    Now let's look a bit deeper.

    Not so long ago, November 2008 to be precise, DHCOG was rated investment grade with "A" or an "AA-".  A "B" rating is a bitter pill, though DHCOG has had prior tastes from earlier downgrades. At any time, a downgrade isn't welcome.  Given Dubai's current difficulties, the downgrade – dangerously close to CCC territory – was probably seen as a direct threat to the company, the parent, and the Emirate itself. Add on top of that a rather broad and sharp criticism of market transparency and reliability and DHCOG's strong reaction isn't surprising.  Another concern might as well be the potential adverse affect on the main shareholder's attitude to the management of the company. What I suspect is the proverbial straw on the camel's back is that S&P signaled that it was likely to further downgrade the company, probably into CCC territory.

    Who dropped who?

    A tricky question. 

    Usually such disputes are settled in such a way that no excessive dust is raised.  The company tells the rating agency it isn't happy with the rating. The rating agency advises that it cannot change the rating. So they find a way to part – an amicable divorce. That wasn't the case here.  Both parties have kicked up quite a bit of dust and it seems more than a few rocks.

    My guess would be the company made the decision to prevent further downgrades. S&P could have maintained coverage and just marked the company down further if it felt the information were inadequate or delivered too late unless of course it felt the situation was so bad that to continue would violate its integrity and potentially cause severe damage to its reputation. The question that can be posed to S&P is how does this lack of market transparency and reliability affect its ability to rate other companies. Is the situation so severe that it needs to withdraw from other rating engagements?

    Just how serious is the dispute?

    Both have levied fundamentally serious charges against one another that go to the heart of the other's competence. And a hint of criticism of integrity.
    1. S&P contends that the company was not providing information on a timely basis and that when supplied the documentation was inadequate. 
    2. DHCOG claims that S&P is unable to understand its business or its relationship with the Dubai Government – in effect the rating agency doesn't have the skills to perform its job. But more than that, compounding its deficient critical skill, S&P is making factually incorrect and misleading statements – a direct attack on its integrity.
    Whose story is the market more likely to find credible?

    In a dispute like this, outsiders are unable to conclusively determine whose story is true.  They don't have the facts so they rely on the reputation of the parties, their presumed motives, and their conduct in the dispute. Dubai is at a disadvantage on all three except perhaps in the region.

    While the folks back home will probably quite naturally take DHCOG's side, the wider market will tend to believe the rating agency.

    Why?

    S&P enjoys a better market reputation than DHCOG. It is a "household name" and has built a perception in the market that it is a smart thorough institution.

    The central reason though will be the perception that the company is motivated by defensive self interest. The downgrade affects the company's access to debt markets as well key deal terms, e.g., tenor, pricing, security and covenant packages.  It may also affect the price of the company's stock since shareholders are legally subordinate to all creditors. Faced with these potential outcomes, it's expected that the company will fight to prevent them from happening. Given the negative outlook, it's likely that S&P would have downgraded the company further. While DHCOG would prefer to avoid the "company" of single "B" rated companies, consorting with those in the "CCC" class has to be an even more distasteful prospect.  Also complicating DHCOG's sales story is the fact that many a company in this sort of situation has claimed that credit or stock analysts didn't understand their businesses or the real worth of the company. But, generally, history has vindicated the analysts.

    On the other hand, the market finds it hard to believe the rating agency has a hidden agenda or gets great benefit from the downgrade. It is seen as doing its job in delivering the bad news.

    So what does a smart company do in this situation?

    The first is to realize that not much can be done.  The rating has been lowered.  No amount of protestation will cause the rating agency to change it. Trying to convince the market that you're right and the rating agency is wrong is difficult, if not impossible, for the reasons outlined above. And a variety of parties are locked into using the rate whether or not they believe it is correct.  Entities subject to Basel II. for their capital adequacy calculation.  Investment companies who are limited to investments of a certain credit grade.  Banks who translate external credit grades into internal models for underwriting decisions and pricing purposes, etc.

    The second is to choose one's battles carefully. There is truth and there is the appearance of truth. The market does not have the facts. It will judge on appearance. Even assuming that the rating agency is dead wrong, the company has to think carefully if a bitter public dispute will help or harm it. One does not want to wind up in a worse position after the battle than before.

    The third is to reply appropriately if one chooses to fight. What arguments are most likely to be plausible? As hurt and perhaps outraged as they were, the wiser thing for DHCOG to have said would be that S&P doesn't understand our business and hasn't given sufficient weight to certain factors. We disagree with the assumptions in their economic model. Their interpretation is therefore wrong. This is much better than saying that the rating agency has the facts wrong, that it lacks the requisite skills or that it is making inaccurate misleading statements. It will be very hard to convince the market that this is the case with a firm with S&P's reputation.  

    Compounding DHCOG's position is that other rating agencies have been downgrading it. So in a sense DHCOG is not just fighting one agency, it is fighting the Big Three. An even larger credibility disadvantage. What the company can hope for is that there will be differences among the agencies and it can therefore discredit the lower rating. But, last December Moody's downgraded the company to "B1" – the same as S&P. Fitch's rating is "BB" – higher but by only one level. All three agencies have assigned negative future trends. This certainly takes the wind out of DHCOG's argument. Where there may be hope is that other agencies will not be so negative about the company's timeliness and quality of information and may not wield as broad a brush in criticizing the local market.  Perhaps, apparently small victories but important victories particularly in this climate.

    Perhaps, in drafting its press release, DHCOG's target audience was the regional market, that in the UAE or one rather important shaykh in Dubai. And for this audience, their approach may have been the right one. But in terms of the wider market, the one that actually matters for financing, it is not. The press release is unprofessional. It sounds too emotional. It looks like it was drafted in a fit of pique. All that is missing is the sound of the foot stomping.

    In the midst of a very challenging refinancing process Dubai Inc. can't seem to avoid scoring own goals.  This isn't the first.  And this isn't the only player (Dubai Inc entity) to do so.  Team Dubai needs to get a better hand on its play (public relations).  The task is difficult enough as it is without needlessly making it worse.   

    Not only for the good of today but as well for the good of tomorrow.

    Wednesday 30 December 2009

    Moody's Downgrades Abu Dhabi Commercial Bank

    Here's a news item with some quotes from Moody's press release on the downgrade.   And another here.

    You can register for "free" to read the original press release at www.moodys.com.  

    After the downgrade, ADCB's ratings are still respectably within "investment grade".

    Wednesday 23 December 2009

    S&P BICRA Ratings - Kuwait Downgraded from 4 to 5

    Standard and Poor's analyzes the health of national banking sectors and then assigns them a rating from 1 (best) to 10 (worst).

    Here's a recent ranking report from 2 October 2009.  A more recent report requires a subscription to S&P.

    This week S&P downgraded Kuwait from 4 to 5.