Now that the dust has cleared on the US$6 billion merger between the Abu Dhabi property companies Aldar and Sorouh, it's the appropriate time to take an assessment of where the new mega-outfit, Aldar Properties, is heading.
Not just for the benefit of shareholders and creditors in the new company, but for the well-being of the UAE, the fortunes of Aldar are critical.
As the second largest listed real estate company in the UAE (after Dubai's Emaar), and an integral player in the capital's long-term economic strategy, what Aldar does over the next few years will affect the livelihoods of citizens and residents throughout the emirates.
Fortunately, Aldar’s new management has been slowly lifting the curtain of confidentiality imposed on it by the merger process for much of the past year. Just recently, there have been presentations to shareholders, and interviews with ratings agencies.
One of the raters, Standard & Poor’s, recently upgraded most of its assessments of Aldar creditworthiness and financial health; the stock market, likewise, has been giving the new entity an encouraging pat of approval, with its shares moving steadily ahead most of this year.
Yesterday, they closed at Dh2.72, compared to Dh1.35 at the beginning of 2013, when the final shape of the merger was still unclear.
One important thing to note is that, despite the disappearance of its name, the Sorouh element lives on. Many of the leading executives of the merged group, including chairman Abubaker Seddiq Al Khouri, are ex-Sorouh, which was generally regarded as a well-run company before the property market got in trouble after the global financial crisis.
The other essential bit of background is that real estate, both in the UAE and in the capital, is in something of a renaissance. In the key areas – residential, hotel, retail and office – Abu Dhabi is experiencing a recovery in prices as supply and demand become better matched. Like Dubai, the capital is benefiting from the UAE’s “safe haven” status.
There is one figure that deserves to be highlighted: Aldar has a landbank of 77 million square feet, surely the biggest in the Middle East held by one developer. And 90 per cent of this is in designated investment zones, like the Khalifa Industrial Zone Abu Dhabi (Kizad) earmarked by the Government for development.
This underlines what is unique about Aldar, in which the government investment unit Mubadala has a stake of 30 per cent: it is part and parcel of the Abu Dhabi Government's economic and social strategy. The same forces that brought about the merger with Sorouh will ensure it is kept on the right path as the emirate implements its long-term strategic plan.
Certainly the analysts are right to focus on financials, as this was the area that got both Aldar and Sorouh in trouble following the crisis. There are big debts left over from that period.
But the determined ongoing strategy is to repay those debts out of cash flows, mainly from government-originated projects. There is a circularity here that persuasively highlights Aldar’s long-term potential.
Debts incurred back in 2010 will be repaid progressively from committed government projects. Net debt of Dh9.6bn is almost entirely covered by future government cash flows, and there is more than Dh4bn of cash still in the bank.
In those circumstances, refinancing an onerous $1.25bn bond due for maturity next year should not be too difficult, and discussions with bondholders are believed to be well under way and progressing smoothly.
S&P noted all this, and in particular highlighted Aldar’s new attitude of caution on the big projects that left it exposed in the past.
All of this, however, begs two questions: why does S&P still regard the likelihood of future government support for Aldar as only “moderately high”?
And why does the rater continue to assess Aldar’s key long-term credit rating profile as BB, still some way off prime investment grade?
Ratings agencies, stung in the crisis like many of the firms they assess, are surely right to be cautious, but Aldar’s position in the UAE’s strategic outlook seems to justify something better.
fkane@thenational.ae
