INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW
ISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552
VOLUME 4, ISSUE 2, SPECIAL EDITION - 2016
CREDIT RATING AGENCIES IN OMAN – AN OVERVIEW
D.PADMALOSANI
Faculty – Accounting and Finance, Department of Business studies, Ibra college of Technology
Introduction
A credit rating agency is a potential source of information for market participants who are trying to
ascertain the creditworthiness of borrowers. Essentially, rating agencies offer judgments (they prefer
the word "opinions"1) about the quality of bonds issued by corporations, governments (including U.S.
state and local governments, as well as "sovereign" issuers abroad), and mortgage securities. These
judgments come in the form of letter grades. The best-known scale is that used by Standard & Poor's
(S&P) and some other rating agencies: AAA, AA, A, BBB, BB, etc., with pluses and minuses as well.
John Moody published the first publicly available bond ratings (mostly concerning railroad bonds) in
1909. Moody's firm3 was followed by Poor's Publishing Company in 1916, the Standard Statistics
Company in 1922,4 and the Fitch Publishing Company in 1924. 5These firms sold their bond ratings to
bond investors in thick rating manuals. In the language of modern corporate strategy, their "business
model" was one of "investor pays."
This relationship between the rating agencies and the U.S. bond markets changed in 1936 when the
Office of the Comptroller of the Currency prohibited banks from investing in "speculative investment
securities," as determined by "recognized rating manuals" (i.e., Moody's, Poor's, Standard, and Fitch).
"Speculative" securities were bonds that were below "investment grade," 6 thereby forcing banks that
invested in bonds to hold only those bonds that were rated highly (e.g., BBB or better on the S&P
scale) by these four agencies. In effect, regulators had endowed third-party safety judgments with the
force of law.
In the following decades, insurance regulators and then pension fund regulators followed with similar
regulatory actions that forced their regulated financial institutions to heed the judgments of a handful
of credit rating agencies.
Credit rating record and its methods:
The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy
or business environment - or more narrowly focused on circumstances affecting a specific industry,
entity, or individual debt issueStandard &Poor's.An endorsement from an NRSRO makes life quicker
and easier for countries and financial institutions wishing to issue bonds. It basically tells investors a
firm has a track record and indicates how likely it is to be able to pay back the money.7
Further impetus for NRSROs comes from the fact that certain regulated investment funds are required
by the SEC to hold only those bonds that have a very high rating from accredited agencies. An
insurance company's strength is also judged by the ratings applied to the investment reserves it holds.
A downgrade of an issuers' rating typically pushes down the value of a bond and raises its interest
rate. It can mean regulated funds must now sell these bonds. But this can cause a vicious circle. If lots
of funds are forced to sell, the price of the bond reduces further. That means a higher interest rate
must be paid, which puts an even bigger strain on the borrower.7
As a statement from the European Commission put it: "As a rating agency has a financial interest in
generating business from the issuer that seeks the rating, this could lead to assigning a higher rating
than warranted in order to encourage the issuer to contract them again in the future."The products to
be rated vary hugely in design. Standard & Poor's says a committee of between five and eight people
www.icmrr.org
245
[email protected]
INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW
ISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552
VOLUME 4, ISSUE 2, SPECIAL EDITION - 2016
decides the actual rating. They base their assessment on a range of financial and business attributes
that might influence the repayment, some of which may depend on the issuer of the bond (i.e. the
borrower).7
When asked why it changes ratings, S&P responded: "The reasons for ratings adjustments vary, and
may be broadly related to overall shifts in the economy or business environment - or more narrowly
focused on circumstances affecting a specific industry, entity, or individual debt issue." S&P gave a
long list of indicators it might use, including "economic, regulatory and geopolitical influences,
management and corporate governance attributes, and competitive position".7
Impact
But the agencies' power does not always cause mass market upheaval. More recent downgrades have
not prompted swings in investor behavior. After the mighty US received its downgrade in 2011, rather
than its cost of borrowing going up, it actually went down, as lenders decided that the US government
was still one of the safest bets in the world. And although the UK government long spoke of the
importance of maintaining its triple-A status, when it was downgraded for the first time in more than
30 years, economists suggested that it would have limited impact.7Moody's was just catching up with
what the financial world already knew - that the UK economy, in line with many others, will take
longer to recover from the aftermath of the financial crisis than expected.78
Ratings Rationale in Oman
On 27 October 2015, the Government of Oman priced its first-time sovereign sukuk, a five-year
domestic issuance of OMR250 million with a profit rate of 3.5% per annum, payable semi-annually.
Moody's definitive rating for these debt obligations follows the provisional rating assigned on 5
October 2015.The A1 rating assigned to the Certificates is at the same level as the long-term issuer
ratings of the Government of Oman, as the sukuk certificate holders will (i) effectively be exposed to
Oman's senior credit risk; (ii) not be exposed to the risk of performance of the Portfolio Assets
relating to the Certificates; (iii) will not have any preferential claim or recourse over the Assets, or
rights to cause any sale or disposition of the Assets except as expressly provided under the
Transaction Documents; and (iv) only have rights against the Government of Oman, ranking
paripassu with other senior unsecured obligations as provided in the Transaction Documents. Moody's
notes that its sukuk rating does not express an opinion on the structure's compliance with Shari'ah
law.10
Oman's sovereign credit profile displays a number of strengths. Real GDP growth will likely remain
positive, although Moody's expects it will slow to an average 2% to 3% per year until 2019, down
from a previously higher growth trend of 4.9% on average between 2005 and 2014. Offsetting this
strength to some degree is the likely sharp fall in nominal GDP this year from the collapse in oil
prices. This will crimp government and private sector incomes. Moody's base case scenario for oil
market trends is a Brent crude price of $55 per barrel on average in 2015 and $53 per barrel in 2016
that rises only gradually to around $75 per barrel by 2019.
Even factoring in the reduced government revenues and resulting higher government debt over the
next one to three years, Oman's debt metrics will still compare favorably with the A-rated median.
The Omani government has substantial financial assets, as well as deposits in the domestic banking
system. Having said that, uncertainty exists over the effectiveness of the government's policy response
to challenges posed by lower oil prices to Oman's government finances, external current account, and
growth performance in 2015 as well as over the next three years. This uncertainty is reflected in the
negative rating outlook on the Government of Oman's issuer rating. 10
www.icmrr.org
246
[email protected]
INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW
ISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552
VOLUME 4, ISSUE 2, SPECIAL EDITION - 2016
RATINGS- UP/DOWN
Given that the issuance rating is tied to the rating of the Government of Oman, the same factors and
considerations would apply.Therefore, given the negative outlook on the government's ratings an
upward movement in the rating is highly unlikely. However, containment of government fiscal
deficits and consequent increases in government debt, and progress in diversifying the economy and
government finances from oil, would place upward pressure on the rating and could cause the outlook
to be changed back to stable.
Conversely, downward rating pressures will increase if diversification efforts slow down, and/or
government finances deteriorate faster than in our baseline scenario, including a significant rise in the
wider public sector debt. 10
Regulatory Disclosures
For ratings issued on a program, series or category/class of debt, this announcement provides certain
regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same
series or category/class of debt or pursuant to a program for which the ratings are derived exclusively
from existing ratings in accordance with Moody's rating practices. For ratings issued on a support
provider, this announcement provides certain regulatory disclosures in relation to the rating action on
the support provider and in relation to each particular rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to
a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case
where the transaction structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.10
For any affected securities or rated entities receiving direct credit support from the primary entity(ies)
of this rating action, and whose ratings may change as a result of this rating action, the associated
regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the
following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity,
Disclosure from rated entity.
Conclusion
Investors may utilize information from a single agency or from multiple rating agencies. Investors
expect credit rating agencies to provide objective information based on sound analytical methods and
accurate statistical measurements. Investors also expect issuers of securities to comply with rules and
regulations set forth by governing bodies, in the same respect that credit rating agencies comply with
reporting procedures developed by securities industry governing agencies. Understanding the history
and evolution of ratings agencies gives investors insight on the methodology that agencies use, as well
as the quality of ratings from each agency. The analyses and assessments provided by various credit
rating agencies provide investors with information and insight that facilitates their ability to examine
and understand the risks and opportunities associated with various investment environments. With this
insight, investors can make informed decisions as to the countries, industries and classes of securities
in which they choose to invest.
www.icmrr.org
247
[email protected]
INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW
ISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:1.552
VOLUME 4, ISSUE 2, SPECIAL EDITION - 2016
References
1. The rating agencies favor that term because it allows them to claim that they are "publishers"
and thus enjoy the protections of the First Amendment of the U.S. Constitution (e.g., when
the agencies are sued by investors and issuers who claim that they have been injured by the
actions of the agencies).
2. For short-term obligations, such as commercial paper, a separate set of ratings are used.
3. Dun & Bradstreet bought Moody's firm in 1962; subsequently, in 2000, Dun & Bradstreet
spun off Moody's as a free-standing corporation.
4. Poor's and Standard merged in 1941 to form S&P; S&P was absorbed by McGraw-Hill in
1966.
5. Fitch merged with IBCA (a British firm that was owned by French business services
conglomerate FIMILAC) in 1997.
6. United States Comptroller of the Currency, Purchase of Investment Securities, and Further
Defining the Term "Investment Securities" as Used in Section 5136 of the Revised Statutes as
Amended by the "Banking Act of 1935," Section II (February 15, 1936).
7. What is a rating agency? - BBC News. (2014, October 20). Retrieved February 17, 2016,
fromhttp://www.bbc.com/news/10108284.
8. Mercatus Center. (2009, October). Retrieved February 10, 2016, from
http://mercatus.org/publication/brief-history-credit-rating-agencies-how-financial-regulationentrenched-industrys-role.
9. A Brief History of Credit Rating Agencies | Investopedia. (2009, April 22). Retrieved January
11,
2016,
from
http://www.investopedia.com/articles/bonds/09/history-credit-ratingagencies.asp.
10. Oman | Economic Indicators. (n.d.). Retrieved February 17, 2016, from
http://www.tradingeconomics.com/oman/indicators.
11. Credit rating GCC-fixed-income-chart-book/GCC-credit-rating-handbook. (2015, July 14).
Retrieved
February
10,
2016,
from
https://www.nbad.com/content/dam/NBAD/documents/Business/market-insights/gcc-fixedincome-chart-book/GCC-credit-rating-handbook-14Jul15.pdf.
www.icmrr.org
248
[email protected]