Ten­sion un­likely to im­pact credit rat­ings

Gulf News - - Business -

Bank­ing Ed­i­tor

The ris­ing geopo­lit­i­cal ten­sions be­tween the US and Iran since May 2019 is un­likely to lead to any change in the credit rat­ings of re­gional sov­er­eigns, cor­po­rate or in­fras­truc­ture debt is­suers, ac­cord­ing to credit rat­ing agency Stan­dard & Poor’s (S&P).

“The in­crease in ten­sions be­tween the US and Iran since May 2019 has not led us to change any rat­ings or out­looks on cor­po­rate or in­fras­truc­ture is­suers we rate in the Gulf Co­op­er­a­tion Coun­cil (GCC) re­gion. This is be­cause, un­der our base-case sce­nario, we do not ex­pect direct mil­i­tary con­flict be­tween the two coun­tries or their re­gional al­lies, and we believe that the Strait of Hor­muz will re­main open to the global oil trade,” Timucin En­gin, an an­a­lyst at S&P wrote in a re­cent note.

Un­der a hy­po­thet­i­cal mod­est stress sce­nario the rat­ing agency ex­pects to see some pres­sure on rev­enue gen­er­a­tion and ac­cess to liq­uid­ity for cer­tain in­dus­tries, but they ex­pect any neg­a­tive rat­ing pres­sure to be limited. How­ever, un­der a more se­vere hy­po­thet­i­cal stress sce­nario, which analysts believe is quite re­mote, they would ex­pect

to see more pro­nounced rat­ing ac­tions in our portfolio.

Cur­rently S&P rates 37 pub­lic cor­po­rate is­suers and in­fras­truc­ture trans­ac­tions in the GCC. The out­look is stable on 33 of them, while they have neg­a­tive out­looks on three en­ti­ties, and one issuer is on Credit watch with neg­a­tive im­pli­ca­tions.

“While we don’t ex­pect the cur­rent geopo­lit­i­cal ten­sions to lead to any rat­ing ac­tions un­der our base-case sce­nario, we do ex­pect cor­po­rates in some sec­tors to face some oper­at­ing weak­ness aris­ing from the geopo­lit­i­cal ten­sions. As we ex­pect the Strait of Hor­muz will re­main open un­der our base case, we ex­pect the oper­at­ing con­di­tions in the oil and gas sec­tor to re­main largely un­changed,” said Tommy J Trask, an an­a­lyst at S&P.

De­spite the limited direct im­pact of the stress sit­u­a­tion on cor­po­rates, the height­ened geopo­lit­i­cal ten­sions is likely to ad­versely im­pact in­vestor con­fi­dence. “The role of in­ter­na­tional in­vestors is quite im­por­tant for key real es­tate mar­kets, such as Dubai, and the height­ened geopo­lit­i­cal risk is not sup­port­ive of in­vestor sen­ti­ment,” S&P said in a note.

Real es­tate prices in the re­gion have al­ready been on a down­ward trend for the past few years. Sim­i­larly, a pro­longed pe­riod of height­ened geopo­lit­i­cal risk in the re­gion is likely to have rev­enue im­pli­ca­tions for the re­gion’s tourism and re­tail in­dus­tries. Given the more stable na­ture of the tele­com and util­i­ties in­dus­tries, analysts do not ex­pect any mean­ing­ful change in their oper­at­ing con­di­tions.

Un­der the sec­ond, more se­vere hy­po­thet­i­cal sce­nario that en­vis­ages the Strait of Hor­muz be­ing closed for an ex­tended pe­riod, which S&P an­a­lyst believe is quite re­mote at this time, they ex­pect more pro­nounced neg­a­tive rat­ings ac­tions. This could be trig­gered by po­ten­tial neg­a­tive sov­er­eign rat­ing ac­tions as well as the de­te­ri­o­ra­tion in the stand-alone per­for­mance of the com­pa­nies. “Of the sec­tors we fo­cus on, the most at risk of weak­en­ing stand-alone cred­it­wor­thi­ness would be oil and gas, petro­chem­i­cals, and real es­tate,” said En­gin.

Cur­rently 33 of the 37 pub­lic cor­po­rate is­suers and in­fras­truc­ture trans­ac­tions in the GCC rated by S&P have stable out­look, while three have neg­a­tive out­looks and one on credit watch.


Ex­perts believe the tanker seizures could cre­ate “a real risk premium” for com­pa­nies that op­er­ate in the Gulf and in­sur­ers that un­der­write them.

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