Credit rating agencies at war (page 1 of 3)

Ratings analysts wield remarkable power in the Gulf. On the back of their opinions, international banks give the green light - or not - to the region's multibillion-dollar construction projects. These ventures are the lifeblood of the regional economy, so the thumbs down from ratings analysts can have a devastating impact on an entire country.

Normally, it's a straightforward process. Analysts at rival agencies crunch the same numbers, throw in the same political risk analysis and come up with more or less identical ratings. When one agency changes a rating, the others almost always follow suit (witness the virtual simultaneous downgrades by agencies during the recent Bahrain International Bank crisis). For lenders and investors, it's easy to know what to do when all the analysts agree.

But what should they do when one analyst says "stick" and the other says "twist"? Investors have wrestling with this dilemma since rivals Moody's Investors Service and Standard & Poor's (S&P) issued conflicting advice on Qatar's prominent RasGas LNG plant.

In February, Moody's downgraded RasGas after the plant's insurers slashed its terrorism cover in the face of mounting regional tension. Moody's cut its RasGas' rating to Baa3, from Baa2.

"While [RasGas] maintains significant liquidity including a six-month debt service reserve, the combination of this liquidity plus any proceeds from insurance may not fully cover the estimated maximum loss that could arise from a terrorist attack," said Moody's. (Since RasGas renewed its insurance policies late last year, terrorism cover has been just $100 million. That is tiny compared to the book value of its onshore assets, which Moody's puts at about $1.6 billion.)

Standard & Poor's took the opposite view. Like Moody's, S&P reviewed its RasGas rating in the light of the insurance development. But S&P analysts decided that nothing much had changed. "Standard & Poor's has concluded that the replacement insurance policies will provide adequate coverage," said a statement. S&P maintained its BBB+ rating, with a stable outlook.

What does all this mean for RasGas, and other megaprojects in the Gulf's investment pipeline? If banks take the Moody's line, the consequences could be dire. Downgrades make projects more expensive to finance, as banks demand higher interest rates to offset the increased risk. And that could lead to some regional projects being shelved. Western and Japanese banks that finance most Gulf projects are already jittery about the threat of war in Iraq on the doorstep. A high-profile rating downgrade will have done little to lift their mood.

"The [banks] are taking a pretty cautious approach," says Darren Stubing, chief bank analyst at ratings agency Capital Intelligence (CI). "At the moment, any project looking for funding will have to pay slightly more." CI does not rate RasGas, but the Cyprus-based niche operator is a major player in the Middle East ratings world.

As result of this caution, sources in the Gulf say some projects are being unofficially put on ice. Project managers fear that if they negotiate loan terms now, they may be stuck with high interest rates for years. The difference may only by 10 or 15 basis points (0.1 percent or 0.15 percent), but on a 20-year loan for $1 billion, that makes a big difference.

"Some project managers are holding back," says Stubing. "And those that are committed are seeing a slight increase in their funding costs."

Qatar alone has a host of projects that could fall victim to an interest rate hike.