Stock market turmoil could hurt EMEA investment/operating holding company ratings, says S&P

Equity markets' volatility has increased significantly, share prices have tumbled, and valuation multiples for nonlisted assets have declined. Consequently, the asset values of many investment and operating holding companies deteriorated considerably during the second half of 2007 and at the start of 2008.

The equity market trend in the Gulf Cooperation Council states remains buoyant, however. While these markets saw a sharp share price correction in 2006, they have been resilient in the more recent global market turmoil. This largely reflects the abundance of capital in the region--resulting from massive oil-related revenues--and scarce investment opportunities.

"Equity prices appear to have stabilized since, but there is potential for further equity market contraction on the back of a weakening global macroeconomic outlook," said Standard & Poor's credit analyst Andreas Kindhal.

"In addition, liquidity in the private equity market is severely impaired, since investors and companies are increasingly hesitant to make new investments, and the recent era of cheap and easy access to financing appears to have come to an end."

Standard & Poor's bases its ratings on EMEA investment and operating holding companies largely on the companies' portfolio risk profile and capital structure--as measured by the ratio of loans to estimated portfolio value (LTV)--as well as on management's capacity and willingness to actively manage these factors and the investment cycle in line within certain rating boundaries. The measures taken by management during a period of falling equity values are therefore very important for the ratings.

"Consequently, although thresholds for LTV ratios might seem distant and out of reach in buoyant equity markets, the magnitude of the recent plunge in share prices could put some holding companies' ratings under pressure, especially those companies whose LTV ratios are already close to the limit for the ratings," said Mr. Kindhal.

This also demonstrates the extreme volatility inherent in equity investments, and reveals how vulnerable investment and operating holding companies' business models can be to equity market fluctuations. In addition, Standard & Poor's will be particularly vigilant about valuation assumptions for unlisted holdings until the financial markets have calmed down.

The predominant share of the 15 investment and operating holding companies we rate in the EMEA region are investment grade, reflecting their conservative financial policies and strong liquidity resulting from listed and partially unlisted equity investments. Outlooks are generally stable, despite recently turbulent equity markets. This reflects prudent balance sheet management, with debt having been maintained at relatively low levels compared with asset values.