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Increasing number of GCC firms seek corporate rating

DUBAI — The number of companies seeking ratings in the GCC is growing exponentially. At the end of 2005 Standard & Poor's, the credit rating agency, had rated only three companies in the region. But by the end of last year this figure had risen to six and then jumped to 13 by 1 April this year, said Standard & Poor's managing director, corporate ratings, Peter Tuving.

Speaking to Khaleej Times, he said the issue of ratings is "now being discussed in lots of companies. Before it wasn't even on the radar", adding that we "should expect quite a few public names (to announce their ratings) this year." Several ratings are kept confidential until it is considered appropriate for a company to enter the capital markets, he said.

There also a trend for more property companies — which are often part of a family-owned business or government-linked organisation — to seek ratings, said Tuving. The need to raise more money than ever before as well as the desire to access international capital are among the reasons driving their decision, he said.

To date, diversified holding companies, and their subsidiaries, typify the "first movers" in the rating game. The latest corporate ratings have been assigned to the Saudi Arabian conglomerate, The Saad Group (BBB+ and stable) and its subsidiary, Saad Trading, Contracting and Financial Services Co. (BBB+); Qatar Fertiliser Co (A+); and 200 million euros of medium-term notes for Kuwait Projects Co (KIPCO) (BBB- and positive). Dubai Holding Commercial Operations Group was assigned an A+ rating in January.

In a separate presentation on corporate ratings in the GCC, Tuving said that all ratings in the GCC are investment grade except for one that is "high yield" and is "highly confidential". He does, however, expect more companies in the region too be assigned a "high yield", or speculative grade, rating.

Rating methodology is based on two broad categories, he explained: business risk and financial risk. The assessment of business risk takes into account such factors as industry fundamentals, a company's competitive position, its management and strategy as well as profitability. The assessment of financial risk considers a company's financial and accounting policy, its capital structure or financial flexibility and its cash flow adequacy. In this part of the world, said Tuving, there is "less focus on cash flow" and more emphasis on issues such as corporate governance, country risk and ownership structure.

Although ownership structures in the GCC are often supportive, through parent or government ownership, structures can be unclear and opaque. Lack of transparency and less effective corporate governance structures are also a concern, he said

The key rating driver of investment and holding companies is financial flexibility, said Tuving, which is largely a factor of portfolio diversity and liquidity.