The credit ratings agencies have come under renewed fire recently. Governments and corporations from the United States, Europe and the Middle East have criticised their decisions to downgrade debt, accusing them of causing damage to economies and businesses. Stuart Anderson, the managing director of Standard & Poor's in the Middle East, puts the raters' case.
Why do you think there has been such an outburst of criticism of the ratings agencies?
I can't speak for the others, but at S&P we have been pretty high-profile, offering an independent and impartial opinion on sovereign debt, and of course in the current state of the global economy, that is sensitive. But we apply transparent criteria across the whole spectrum, and produce an objective assessment, of governments as well as corporate issuers. There is no political agenda. We are calling it as it is.
I've got to point out that the sovereign ratings have a pretty strong track record. For example, we first began to downgrade Greece in 2004 from A plus, long before the country's problems became apparent. When we downgraded the USA and France from AAA, there was a positive reaction in this region, as a recognition that S&P applies uniform standards. Not even what you might call our "home market" like the USA got privileged treatment.
Can S&P's business model survive what some commentators have called a "crisis of confidence" in the raters?
I know there's been a lot of talk recently about government-sponsored ratings agencies, but we don't think that's the way to go about it, and on the whole the markets agree. Just recently, several German corporates came out and said they didn't want ratings agencies backed by their governments.
The business model has been driven by the "issuer pays" principle, and we continue to believe that's the best way. It offers distinct funding advantages. It's been estimated that an issuer coming to the debt markets will be able to get an advantage of anything from 50 to 100 basis points with a rating, as opposed to without one. Some pension funds, for example, are not able to invest in non-rated funds.
It should be seen as part of the process of transition from relatively low-profile private companies to a more transparent structure. The recent Majid Al Futtaim bond, for example, which we gave a BBB rating, has set a benchmark for corporates in the region, and many others will aspire to that.
Our charges are not expensive in the context of the whole process, for example set against investment bank and other advisory fees. We charge a fee for annual surveillance, and a percentage of the value of the issue. It's relatively modest.
DP World recently stopped using the services of S&P. Can you give your take on that?
We recognise there will be occasions when the issuer isn't happy, and it's a serious issue when they ask for it to be withdrawn. With DP World, we set out our criteria last year with our views on government-related enterprises, not just for Dubai but globally. Our opinion reflected where they sit in the ownership chain within Dubai, and the "messaging" we get from Government as to the likely level of support. We also take into account the level to which the issuer is strategically important.
In our view, issuers like DIFC Investments and Dewa [Dubai Electricity and Water Authority] would enjoy relatively more support from the Dubai Government. As a rule, we don't rate a subsidiary higher than its parent, in this case Dubai World, which has been through a restructuring process. There's also the fact that ratings take into account the level of impaired bank debt. But basically we agreed to disagree with DP World. There is always an element of "churn" in the ratings business. We normally lose one issuer for every three we gain.
How does S&P view the overall health of the Gulf and UAE in the light of the euro-zone crisis?
The UAE is the largest financial hub in the Gulf, and the banks are strongly capitalised, with reported Tier 1 ratio around 16. It's also not reliant on wholesale funding, which is a good thing in the current climate.
We have some concerns about asset quality, especially with relation to real estate. Has it turned the corner or not? It's a big assumption that all will be OK by 2015. But for Dubai, the story is positively balanced by its success as an aviation, tourism and logistics hub.
The European banks that are traditionally strong players in the Gulf are under a lot of pressure, and therefore refinance risks will be greater. But we think the trend is with sukuk and fixed-interest instruments, which is our core business.
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