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Credit rating is access to global capital market.

Dubai: The Dubai Chamber of Commerce and Industry has reported a 25 per cent increase in the number of companies seeking a credit rating from the agency in 2013.

Credit rating has been recognized as an essential tool to good number of UAE companies to have an easy access to global capital market, international rating firm told Gulf News. New restrictions implemented by most of the international financial institutions following the world economic crisis have been recently the main driver for UAE based companies to seek credit rating.

"In recent years we have seen an increase in businesses using this service, which is indicative of the increasing awareness of the importance of business intelligence. One thing that has always been the case, but was highlighted during the global financial crisis, is the need for companies to do their due diligence when it comes to making investments," said Hamad Buamim, Director General, Dubai Chamber.

Buamim remarked that Dubai Chamber brought about its credit rating service due to demand from the business community for accurate access to information.

"Our service gives information on the credit rating of the concerned company in addition to its business, economic, and financial information. This gives the requesting company a clear idea about the solvency of the other company and so they can make an educated decision about making investments. Other things the credit rating service can highlight include issues with payment history, purchasing terms, major customers, as well as export and import data and market statistics," he added. Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments.

Moreover, one of the main international rating agency, Fitch Ratings, has seen an increasing interest over the last 18 months in the Middle East from the industrial sectors including construction and real estate, oil & gas and transportation, especially from companies in the UAE.

"Maintaining certain rating levels will have an impact on the investment and/or lending guidelines for these counterparties," said Jay Leithner, Senior Director, head of Middle East and Sub-Saharan Africa Business and Relationship Management at Fitch Ratings.

However, he added that although the number of firms engaging with the large credit rating agencies is still very low compared to the overall number of firms operating in the region.

On the other hand, Moody's currently rates 28 non-financial companies in the GCC and continuing to see an increase in enquiries for rating.

Moody's rates 60 financial institutions, of which 16 are in UAE, eight insurance companies and 28 non-financial corporates in GCC, according to Moody's report.

Jehad El Nakla, General Manager of Moody's Middle East Office in Dubai, remarked: "Moody's rating allows companies to tap domestic and international capital markets and helps facilitate successful cross-border debt issuance while benefiting from our transparency, expert analytical capability and independent opinion of credit quality."

"In the GCC, financial institutions are usually the first to get a rating considering their immediate need to establish money market lines with international banks. Moody's is also seeing large companies especially government related ones seeking ratings to raise capital to finance large scale projects in areas like telecoms and infrastructure," El-Nakla said.

"Another area we are seeing strong interest for ratings is from insurance companies, which is in line with the potential growth in this sector across the GCC. Moody's has expanded its insurance focused analytical team in Dubai to meet this growth in demand," he added.

While there are two type of rating, public or confidential, Stuart Anderson, Managing Director & Regional Head Middle East, Standard & Poor's clarified the significance of confidential ratings and how it helps companies obtain an objective assessment of their relative strengths and weaknesses on a range of criteria including financial discipline and flexibility, profitability, growth expectations, liquidity, funding diversity, market position, geographic diversification, competitiveness, and ability to withstand cyclical economic pressures.

How it works

He also highlighted how Standard & Poor's evaluates its credit quality and likelihood of default based on a variety of information including the issue's terms and conditions, its unique legal structure, relative seniority of the issue with regard to the issuer's other debts and priority of repayment in the event of default.

"The existence of external support or credit enhancements are also considered including mechanisms such as letters of credit, guarantees, insurance, and collateral, which are protections designed to limit the potential credit risks associated with a particular issue," Anderson said.

In the Middle East, Standard & Poor's issues approximately 140 public ratings.

Usually, the credit rating process normally takes three months.,. however, Anderson said that this could be shorter or longer depending on the availability of information requested and access to management.

"For new corporate ratings, we often recommend that a company gives itself plenty of lead time, especially if a bond or sukuk issue is being contemplated. It can be beneficial for corporate to do a confidential rating through an annual rating cycle in order to get comfortable with the process before going public. The commitment of management time is a very important part of the rating process," he added.

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Publication:Gulf News (United Arab Emirates)
Article Type:Industry overview
Geographic Code:7UNIT
Date:Aug 11, 2013
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