Text size:

  • Small
  • Normal
  • Large
Emirates Airline was named in the top 10 first class cabins by therichest.com. Find out what position it came here.

Moody's studies support for Abu Dhabi firms

In fall-out from Dubai World's debt troubles, ratings agency wants a clear show of government backing for borrowers.

In the latest fallout from Dubai's debt troubles, Moody's Investors Service is warning that it may cut credit ratings on several companies controlled by the Abu Dhabi Government if officials fail to convince the agency that they would never be allowed to go the way of Dubai World. The credit ratings agency issued a report last week outlining the criteria it is using to determine whether to continue giving such UAE companies as Mubadala Development and the International Petroleum Investment Company (IPIC) higher ratings on the strength of their government ties.

Saying they were in discussions with government officials, Moody's analysts warned that if they came away with even slightly less confidence in the likelihood of a potential government bailout, "some ratings could drop by several notches". Such "implicit guarantees" were widely assumed before Dubai World said it would ask creditors to renegotiate the terms of up to US$22 billion (Dh80.8bn) in debt.

Dubai World's announcement in late November that it planned to request a standstill on debt repayments triggered a cascade of ratings downgrades of Dubai Government-related borrowers by the three major credit ratings agencies - Moody's, Fitch Ratings and Standard & Poor's (S&P). Analysts at the agencies said they could no longer assume the governments would step in should their companies run into financial trouble.

Moody's last month went even further, placing seven of Abu Dhabi's most prominent companies on review for potential downgrades, including Abu Dhabi National Energy Company (Taqa), Aldar Properties, Dolphin Energy, IPIC, Mubadala and the Tourism Development and Investment Company (TDIC). Moody's also said it was reviewing the rating of Emirates Telecommunications Company (Etisalat), which is controlled by the Federal Government.

"We thought in light of the large downwards revisions in our assumptions of support from Abu Dhabi to Dubai that we should also review our support assumptions for Abu Dhabi GRIs [Government-related issuers]," said Tristan Cooper, a sovereign ratings analyst at Moody's in Dubai. It was a controversial step, one that sources working close to the Abu Dhabi Government said caused considerable concern among the emirate's officials. No Abu Dhabi companies appear to be in financial straits, and with an estimated $425bn in assets at its two largest sovereign wealth funds, Abu Dhabi appears to have more than enough to support them if the need arose.

No other ratings agency has, therefore, extended its reaction to Dubai's debt problems to Abu Dhabi. But even the prospect of lower ratings can raise borrowing costs for an issuer. Abu Dhabi's Government and corporations sold billions of dollar in bonds last year to fund the emirate's ambitious infrastructure plans and to help promote more diverse capital markets. Moody's move could therefore complicate the often testy relationship between Abu Dhabi companies and the ratings agencies.

Last year Taqa terminated its ratings contract with S&P when the agency put its rating up for review, citing its heavy borrowing. And Abu Dhabi Commercial Bank, whose rating Moody's downgraded last month, is part of a class-action legal proceeding against Moody's and S&P, accusing them of inflating ratings on investments related to subprime mortgages. Mr Cooper said that Moody's had long recognised that Dubai had a limited capacity to support the growing debts of its own companies and so any such support, if needed, would have to come from Abu Dhabi or from the Federal Government.

That Abu Dhabi's support came so late - only after Dubai World's standstill request - sent up a red flag at the agency. So did the fact that Abu Dhabi's $10bn in new support funds was said to be contingent on Dubai World winning an agreement from its creditors to delay its debt repayments. What appeared to worry Moody's was the potential for selective, or what some call strategic, defaults. In other words, governments might choose not to bail out some government-controlled companies even if they could afford to.

Moody's said government support might be less likely if a company could be allowed to default without affecting its operations or losing control of them. "Lack of support is a particularly likely outcome if the GRI is likely to continue to be able to execute its core functions even after having defaulted on its debt," the Moody's report said. Governments are also less likely, Moody's said, to support companies that are financially weak. "They will distinguish between GRIs that are viable but need temporary liquidity support and those that lack economic value net of their liabilities," the Moody's report said.

"Dubai World is also an illustrative example that some issuers can default without creditors being able to force a bankruptcy or enforce judgments that would impair the Government's control," it said. "This condition makes default less painful to the sovereign, and therefore support is much less likely." @Email:warnold@thenational.ae

Back to the top

More articles

Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Miele coffee maker making Cappuccino at Miele Gallery in Sama Tower in Dubai. The cost of this coffee maker is around Dh 17,000. Pawan Singh / The National

Space-age coffee comes at a price from Miele

Miele have taken the coffee machine to a new level with its Dh17,000 offering that is built into your kitchen.

 The bridge of Seajacks Hydra, as the wind farm installation vessel undergoes finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014. Jeffrey E Biteng / The National

In pictures: Building the Seajacks Hydra

The Seajacks Hydra, a wind farm installation vessel, is undergoing finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 The rush of new supply of hotel rooms pushed Dubai occupancy rates down to 87 per cent. Sarah Dea / The National

Dubai hotel room rates rise 10 per cent

The rush of new supply pushed occupancy rates down to 87 per cent, a dip of 2.6 per cent from the previous year. Winter months are the strongest for Dubai hotels, with occupancy and prices falling to half their peaks by July.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.


To add your event to The National listings, click here

Get the most from The National