One Pleaded Damage, The Other Argued Integrity

Source : The Business Times, March 20, 2008

Inside peek at the arguments that raged between Allco Reit, Moody’s.

Allco Commercial Real Estate Investment Trust (Allco Reit) fought hard against a credit ratings downgrade by Moody’s Investors Service because it believed the downgrade would cause it ‘irreparable damage’.

But Moody’s stuck to its guns as it felt its very integrity - as well as that of the market - was at stake.

Both sides presented impassioned arguments - till now unknown to the public - before the High Court earlier this month. The battle raged in chambers, away from the eyes of the media and members of the public.

The Business Times managed to get an inside look into the case, by inspecting documents filed with the High Court.

The case had made headlines yesterday when it became known that Allco Reit had taken legal action to prevent Moody’s from downgrading its credit ratings. Little else was known about the suit other than the fact that Allco Reit’s action failed, and Moody’s went ahead with the downgrade.

The documents point to a spirited tussle. Nicholas McGrath, CEO of Allco Reit, said in his affidavit that he had earlier this year impressed upon Moody’s vice-president and senior credit officer Peter Choy that it was ‘crucial that there was no revision of Allco Reit’s rating before requisite credit approvals from bankers are obtained for the refinancing of debt worth S$620 million (on March 20, 2008)’.

Mr McGrath, represented by Senior Counsel Alvin Yeo of Wong Partnership, said he was assured by Mr Choy that Moody’s ratings panel would not meet before March 20.

Allco Reit subsequently announced through the Singapore Exchange (SGX) on March 9 that it was considering selling its Australian assets - properties valued at A$483 million (S$617 million) - in the wake of an Australian media report.

Mr McGrath said he had informed Moody’s that the sale was not confirmed, but that Moody’s ratings panel had still felt the need to meet to discuss Allco Reit’s SGX announcement. It was at this meeting that the panel decided to downgrade Allco Reit’s rating, on the basis that it was selling its Australian assets.

Mr McGrath said it was ‘puzzling’ that Moody’s would downgrade Allco Reit’s rating on the basis that it was merely considering the sale of such assets, adding that the agency’s ‘precipitous and wholly unwarranted conduct is baseless’.

He said the trust then felt compelled to obtain a court injunction to stop the ratings downgrade, as such a revision would result in ’serious and irreparable prejudice and damage to Allco Reit’.

Moody’s, represented by Senior Counsel K Shanmugam of Allen & Gledhill, responded to Allco Reit’s claims and sought to set aside the injunction. The agency argued that it cannot - and should not - ever be prevented from issuing its current views on credit ratings, as that was the very basis of its existence.

Mr Choy, in his affidavit, said that Moody’s customers must accept the ratings agency’s independence and the fact that they cannot control or influence its ratings.

He said that Mr McGrath’s assertion that Moody’s had agreed to suspend its review of Allco Reit until March 20 has ‘no basis whatsoever’ - as such a decision by Moody’s would effectively undermine the value of the ratings it issues.

He added that the injunction which Allco Reit sought, to prevent Moody’s from downgrading the trust’s rating, prevented the public from accurately judging Moody’s assessment of Allco Reit’s credit worthiness.

He referred to the regulatory requirement that all Reits registered with the Monetary Authority of Singapore must have a rating from one of three agencies - Moody’s, Standard & Poor’s or Fitch Ratings - and for that rating to be disclosed to the public.

Moody’s pushed for the injunction to be lifted, on the basis that its very integrity was at stake.

Justice Choo Han Teck lifted the injunction on Tuesday morning, but didn’t specify his grounds for doing so. Allco Reit had intended to appeal the decision but later withdrew its appeal when Moody’s went ahead and issued its downgrade of the Reit.

The agency lowered the trust’s corporate family rating to ‘Ba2′ from ‘Ba1′ - and retained the ratings on review for further possible downgrade.