The newly established Cyprus office of the US’ Moody’s Investors Service is expected to release its first ratings for Middle East financial institutions in the autumn. And by the end of 1995, the agency plans to have issued ratings for a broad range of the major international institutions based in the region (MEED 16:6:95). The London-based IBCA is also increasing activity in the region through an initiative that aims to establish ratings offices in several Arab states (MEED 24:2:95).
Moody’s is initially limiting its focus in the Middle East to the banking sector, and those institutions in areas where there is an active interbank market. Most of the ratings are likely to be for Gulf-based banks.
Each institution will be issued a short-term rating, for securities maturing in less than one year, and a long-term rating, for the creditworthiness of obligations that extend for more than one year. The categories start from Aaa, the highest creditworthiness, and drop to C, indicating the greatest credit risk.
The long-term rating will entail an assessment of the sovereign risks affecting the bank’s activities in the country where it operates. This cannot be equated with a pure sovereign risk rating, but it is likely to provide an initial indication for any future sovereign rating. For most countries in the Middle East it will be the first time they have received any rating from an internationally recognised agency.
In addition, Moody’s will also issue each institution with a financial strength rating, ranging from A-E. This will focus on the bank’s intrinsic strength, which gives less account to the sovereign risk.
The IBCA-backed initiative will focus on corporate ratings. Most of the companies targeted will be outside the Gulf, although the new ratings agency headquarters is expected to be in Bahrain. The new firm will have authorised capital of $5 million. The three founding shareholders are IBCA, with a 60 per cent stake, and the IFC and Arab Monetary Fund, each holding a 20 per cent stake.
‘We will be setting up local ratings agencies in Arab countries where the market is ready for ratings,’ says Robin Munro-Davis, managing director of IBCA. Countries which have shown an interest in establishing a ratings office so far are Tunisia, Egypt, Jordan and Lebanon. Each local office is expected to have a local shareholding.
Candidates to head the holding company are now being interviewed, and an appointment is expected to be announced before the end of September. The Bahrain office is expected to be opened in October.