Friday, December 11, 2009

The Night of the Rating Agencies

The rating agencies have in rapid succession changed their position of Dubai and UAE entities, almost like in famous night of the generals from World War II, where former darlings fell from grace.. Suddenly the very story they were selling so well a year ago is being shot down by them in their supposed zest for 'caution'. In what clearly seems a case of jittery nerves Moody's has down graded three UAE based banks citing the over all financial situation over the Dubai World debt to be the reason for caution. Interestingly they say this when on November 29th, 2009, yes just about 10 days back, they said that UAE Banks rating were on review and then do not explain the reasons for the downgrade other than some prosaic general statements. I know a Moody's spokesperson will say yes the result of this review is the downgrade yesterday of EmiratesNBD, Dubai Islamic Bank and Mashraq Bank.

To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see where transcripts of the actually filed complaint appear.

Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.

Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.

Here is how is see why the panic is not being seen in balance.

1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.

I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.

I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?


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