There has been a great deal of commentary about Moody’s withdrawal of its rating from the National Gas Company of Trinidad and Tobago. That commentary and controversy was inevitable. NGC is not an ordinary company. It sits at the centre of the country’s gas economy, the petrochemical estate, the LNG chain and, by extension, the fiscal fortunes of the country. When a rating agency withdraws from such an institution, the matter cannot be treated as a routine administrative occurrence.
The reality is that NGC has handled the issue clumsily. This is a matter that should have been addressed proactively. It highlights the lesson that in public finance, a vacuum is never neutral. Where an institution fails to explain, others will step in and explain for it. That is what has happened.
Commentators have stepped forward with opinions, some of them confident, some of them political, but I will go so far as to say that many of them were detached from an understanding of how rating agencies actually work. It is clear from much of the commentary that the media have chosen to engage people who neither understand the differences among the agencies nor remember how those differences have already shaped the national conversation. Neither condition qualifies them to guide the public on this matter.
There was a time when, in order to value and trade bonds, I would have had to review the methodologies of Moody’s, Standard and Poor’s and Fitch, then develop an internal rating model for where I was employed at the time. That work leads to the understanding that a credit rating is based on a weighting system across a specific methodology and different rating agencies have different methodologies.
Moody’s tends to organise sovereign risk around economic strength, institutions and governance, fiscal strength and susceptibility to event risk. The centre of gravity is the capacity and willingness of the sovereign to carry debt through cycles.
For a government-related issuer, Moody’s typically starts with the entity’s stand-alone credit quality, then considers dependence on government, probability of support and the constraints imposed by the sovereign. That matters greatly for NGC. If the sovereign is rated below investment grade, and if the company is viewed as deeply tied to government policy, fiscal flows and national energy risk, the company’s rating is likely to feel the gravitational pull of the sovereign. That is a material risk to NGC at this time.
S&P uses a different architecture. Its sovereign work is built around institutional, economic, external, fiscal and monetary assessments. It also places considerable emphasis on the balance between weaknesses and buffers. A country with fiscal slippage can still be defended by external assets, monetary credibility, institutional continuity and a demonstrated capacity to finance itself. That is why S&P can look at Trinidad and Tobago and remain concerned, yet still hold the sovereign inside investment grade.
Fitch again comes at the problem differently. Its sovereign approach has a strong model-based element, with a sovereign rating model on top of which sits a qualitative review. Its treatment of government-related entities is also explicit about legal status, ownership, control, support record, the social or political implications of default and the financial consequences for the state. That does not make Fitch lenient. It makes Fitch different. In the case of NGC, that difference can be material because the company’s credit story is not merely its profit and loss account. It is also its strategic role in the national energy system and the potential for new gas is part of that qualitative story.
Differences
These differences matter and we need to approach the issue from the understanding of: which methodology most faithfully captures the risks and strengths of NGC at this particular moment in the country’s economic cycle.
It is a failing of the media narrative that the public seems to have forgotten that Trinidad and Tobago has been here before. The divide between an S&P rating and a Moody’s rating is not new and has been in existence for some time now.
There was a time when the country carried a broadly comparable investment grade story from both S&P and Moody’s. It was not always identical notch for notch, but the market signal was broadly aligned. Yet even then for Trinidad and Tobago, there was divergence with S&P carrying the sovereign in the “A” category and Moody’s also maintaining an investment grade view, although in the upper “B” category.
The divergence was more impactful after the energy sector challenges over the last decade. Gas production weakened, energy revenues fell, the economy stagnated and fiscal deficits widened. Public debt became a factor and foreign exchange shortages became more visible. The country still had assets and institutional stability, but the trend had moved against it. The agencies agreed on the direction but their rating paths were different because their methodology caused them to dimension the risks differently.
The objective reality is that Moody’s became the more severe judge. It focused heavily on the deterioration in fiscal strength, the weakness in growth, the dependence on energy revenues and the reduced ability of the state to rebuild buffers quickly. Over time, that pushed Trinidad and Tobago below investment grade in Moody’s framework. S&P also downgraded the sovereign over the years, but it kept the country at BBB minus, the lowest rung of investment grade. That difference is not cosmetic. In capital markets, the gap between BBB minus and Ba2 is the gap between an investment grade sovereign and a speculative grade sovereign.
The divergence became a public issue by 2017. The Government had been engaging Moody’s and S&P for several years. Then Cabinet approved the engagement of Fitch as a third rating agency for a period of 2018 to 2022. Fitch was to review the country’s sovereign debt ratings and provide an initial private or indicative rating. The stated reason was the variance between the ratings being provided by Moody’s and S&P.
The Government was telling the market, and implicitly the agencies, that it would not allow one methodology to dominate the national credit narrative. Without saying as much, it was seeking a third lens through which to test whether Moody’s had become too harsh.
There was another complication in 2018. Outdated natural gas production data had been provided to S&P. That helped trigger a negative outlook. The Government then moved to correct the data, saying the economy had contracted by less than the incorrect figures suggested and that growth was likely in 2018. That episode matters because ratings are only as good as the information fed into the process. The lack of data from the NGC is essentially why Moody’s withdrew its rating.
Parallels
By now you should appreciate that there are parallels with the NGC discussion of today and the national discussion in 2018. The company operates in a difficult setting. Trinidad and Tobago has been trying to recover LNG value through revised Atlantic LNG arrangements. New gas projects are expected to improve supply by 2027/8. At the same time, the petrochemical sector has faced gas curtailment, plant closures, contract uncertainty, tariff pressure and disputes over port charges. NGC is exposed to all of that. It is a commercial entity, but it is also an instrument of national energy policy.
In that context, one can understand why NGC might prefer Fitch over Moody’s. Moody’s lower sovereign view creates a harsher starting point. If Moody’s places strong weight on the link between NGC and the Government, then NGC may be pulled down by sovereign fiscal concerns.
It remains to be seen whether Fitch may offer a framework that better captures the nuances of the NGC in a more positive light. It could be that Fitch may be the more useful agency for explaining NGC’s credit story at this point in the cycle. The danger is that the public will interpret a move away from Moody’s as an attempt to shop for a better answer. NGC can avoid that only through full transparency.
It is important to note that with portfolio managers if there are two credit ratings some will defer to the lower rating. That means that the Moody’s rating may hold sway in the decision making process and the value of the higher S&P rating is diminished.
Moody’s and S&P already looked at the same sovereign (Trinidad and Tobago) at the same time and with similar data and drew different conclusions about the weight to be placed on fiscal deterioration, external buffers, institutions and energy risk. The Government previously responded by challenging assumptions, elevating the S&P investment grade narrative and even bringing Fitch into the frame. NGC is now replaying that argument at the corporate level albeit, as I previously indicated, in a very clumsy manner.
Ian Narine is a Financial Consultant who does not rate the current ratings discussion. Please send your comments to ian@iannarine.com
