Moody's comments on Gulf conglomerates and investment holding companies

In this context, the rating agency has published its Rating Methodology for Global Investment Holding Companies and further specified its approach to corporate conglomerates in two separate research documents, thus providing an important analytical distinction between the two types of companies.

"The Gulf is home to a large number of publicly, privately and sovereign owned investment holding companies, whose principal objective is to acquire minority stakes in a diverse range of largely equity investments,"

says Philipp Lotter, a Senior Credit Officer at Moody's Middle East based in Dubai/DIFC.

"In such cases, the equity risk of the subsidiaries is the main analytical driver rather than their credit risk, as would be the case for a conglomerate," Lotter adds.

Moody's currently rates one investment holding company in the Gulf region, namely Kuwait-based National Industries Group, which is rated Baa2. It also rates a number of companies that qualify as conglomerates, including A1-rated Dubai Holding Commercial Operations Group and (P)Baa1-rated Saad Group. Such companies -- according to Moody's -- invest in several non-related industries, predominantly as wholly or majority owned investor, and act as a single entity with no significant barrier to reallocation of capital within the group. A conglomerate tends to own at least three core businesses in non-related industries that each contribute more than 10-20% of earnings or assets. Accordingly, the credit risk of the underlying businesses constitutes the main ratings driver.

Moody's publication of its Rating Methodology for Global Investment Holding Companies will significantly enhance analytical transparency, particularly for the array of Gulf companies that fall into such categories, by providing a clear and common approach to defining credit risk. In particular, Moody's focuses on six core rating factors in its assessment of investment holding companies. These are (1) asset quality,
(2) management discipline and group transparency, (3) market value-based leverage, (4) cash coverage, (5) liquidity and (6) portfolio risk. All these factors, and related sub-factors, are further explained in Moody's report.

"Our methodology sets out a framework for assessing credit profiles of companies, whose credit risk is largely linked to factors such as market volatility, investment policies, as well as asset quality and diversification,"

says Eric de Bodard, Moody's Chief Credit Officer for Europe, Middle East & Africa (EMEA).

"Accordingly, the analysis of the credit risk of such companies must be based on a portfolio-approach rather than focusing on consolidated group accounts within the context of a more conventional bottom-up credit analysis", de Bodard adds.