x Abu Dhabi, UAESunday 21 January 2018

Ratings downgrade for four Dubai firms

Credit ratings agencies downgraded four government-controlled companies Tuesday amid uncertainty over whether they will receive state support.

Credit ratings agencies downgraded four Dubai government-controlled companies yesterday over uncertainty whether they will receive state support in refinancing their debt.

Standard & Poor's (S&P) yesterday downgraded three of the six Dubai government-owned companies it had placed on review for a possible downgrade in late April. They are DP World, Jebel Ali Free Zone and Dubai Multi Commodities Centre Authority (DMCC).

Moody's Investors Service downgraded Dubai Holding Commercial Operations Group (DHCOG), a unit of Dubai Holding, and placed Emaar Properties on review for a possible downgrade, despite the recently announced merger between Emaar and three of DHCOG's property developers.

Dubai raised about US$80 billion (Dh293.84bn) to turn the emirate into a regional tourism centre by building vast hotels, shopping malls and high-rise residential developments. But the slump in property prices and a global credit squeeze have made it difficult for companies that relied heavily on debt finance to roll over loans and bonds taken out during the boom.

"Our view has shifted. We can no longer assume that the government will provide support without questions asked," said Jan Willem Plantagie, the managing director of S&P Middle East. "We are not saying that the Government will not provide support but we have to be more cautious when looking at the totality."

In April, S&P said it would review government entities because it was no longer certain of support after the Government allowed Nakheel, the Dubai World company that is building the emirate's three palm islands, to enter restructuring talks to refinance its $3.5bn Islamic bond, which is due in December. Dubai World hired AlixPartners, the consultancy that is advising on the General Motors bankruptcy, to help review its billions of dollars of debt commitments.

Nakheel's outstanding bond has focused the attention of credit ratings agencies on the ability of other state-controlled companies to refinance their debts. "This reappraisal is the result of increased uncertainty regarding the Government's willingness to provide support to Nakheel, a key government-related entity with sizable repayments coming due at the end of this year," S&P said.

The Dubai Government's $20bn bond programme, of which $10bn has already been raised from sale of debt to the UAE Central Bank, is aimed at ensuring no companies central to the emirate's economy will be allowed to default. But S&P says a possible debt restructuring at Nakheel would be categorised as a "selective default". "The question of support is still wide open," said Mr Plantagie. But he said the ratings agency had not had any contact with the Dubai Government or Nakheel since April.

Given the Government's "extremely high" debt burden, large upcoming payments and difficulties to find refinancing, S&P has started to rank government-owned companies in terms of their economic importance. Mr Plantagie said S&P considered DIFC "a government authority whose role was absolutely essential". As such, it was almost certain to receive government support, he said. As a result, S&P affirmed the rating of DIFC Investments, the investment arm of Dubai International Financial Centre, but kept DHCOG on possible review for downgrade. DHCOG owns property developers such as Sama Dubai, Tatweer and Dubai Properties.

Moody's cited continued challenges to the business and financial profiles of DHCOG and Emaar. "Whilst Moody's acknowledges that Dubai's property market seems to have largely bottomed out, the financial and structural implications of its decline have taken its toll on both companies' debt protection metrics," said Philipp Lotter, a Moody's senior vice president. "Moody's believes that these are likely to weaken further before the full effects of market recovery translate into stronger cash flows, irrespective of the announced merger."

S&P said it would publish updated reports on each of the companies soon.