A major unit of Dubai Holding has had its credit rating downgraded for the second time in seven months by Moody's Investors Service. The credit ratings agency downgraded Dubai Holding Commercial Operations Group (DHCOG) by one notch on its rating scale to "B2" from "B1"and kept it on review for another drop. DHCOG, which has large holdings in the hospitality, business parks and property sectors, was unavailable for comment. The group was downgraded to "B1" last December, a rating already considered below investment grade.
Credit ratings assess the risk that companies and governments will default on debt. The ratings are important because they influence the interest rates borrowers must pay on loans and bonds: those with lower ratings are typically charged more. A "B2" rating is assigned to companies whose debt is "considered speculative" and "is subject to high credit risk", according to a Moody's description of its ratings.
The DHCOG downgrade resulted from "the continued negative impact that the challenging conditions in the Dubai real estate market are having on the group's financial profile" that contributed to losses of about US$6.4 billion (Dh23.5bn) last year, Moody's said. DHCOG is the parent company of the Jumeirah Group, a hospitality division that owns Dubai's luxurious Burj Al Arab hotel, and TECOM Investments, which owns and operates several economic free zones in the emirate. It also owns Dubai Properties Group, the developer behind the 40-tower Jumeirah Beach Residence complex in Dubai Marina.
In addition to the effect of a languishing property market, "DHCOG's free zone and hospitality businesses, which are managed by its fully owned subsidiaries TECOM and Jumeirah, were also negatively affected by the economic downturn, although on a relatively smaller scale," Martin Kohlhase, a Moody's analyst in Dubai, said yesterday. "As a significant portion of DHCOG's revenues remain linked to the property sector, growth in future cash flows will be correlated to a recovery in Dubai's weak real estate market, which therefore remains an important rating driver."
Numerous companies in Dubai and even in Abu Dhabi have been downgraded by the three big ratings agencies - Moody's, Fitch Ratings and Standard & Poor's - during the financial crisis. A $23.5bn debt restructuring begun last year at Dubai World, another government-owned conglomerate, has quickened the pace of downgrades. Dubai World recently reached an agreement with its core group of creditors on the restructuring proposal.