During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.