Moody’s Downgrade Dubai Government Corporates

Moody’s Investors Service has concluded its review of the ratings of six government-related issuers (GRI’s) in Dubai and has taken multiple rating actions resulting in confirmations of four companies, and downgrades on two companies. The outlook on all ratings is negative.

Companies whose ratings were confirmed are DP World (rated A1), Dubai Electricity & Water Authority (DEWA, rated A1), Jebel Ali Free Zone (Jafz, rated A1) and DIFC Investments (DIFCI, rated A1). The outlook on all ratings is negative.

Companies whose ratings were downgraded are Dubai Holding Commercial Operations Group, which was downgraded to A2 from A1, and Emaar Properties, which was downgraded to Baa1 from A3. The outlook on both ratings is also negative.

Today’s rating actions conclude Moody’s review of all six companies, whose ratings were placed on review for downgrade on 2nd February 2009. For analyses and rationale of separate ratings, please refer to the individual Credit Opinions of each issuer, which will be available shortly on moodys.com.

Moody’s highlights that the recent provision of federal funds to Dubai in the form of a USD 10 billion bond as part of a USD 20 billion programme has provided greater assurances to the market, that explicit financial support from the federal government is forthcoming and that Dubai (and any other of the nation’s 7 Emirates) must be assessed as integral components of the United Arab Emirates (UAE) that will benefit from the solidarity that exists within the Federation. Indeed, the severity of potential rating actions, which Moody’s stated at the beginning of the review could have been within a magnitude of two notches, was moderated as a result of the supportive action by the federal government. We thus balance a severe deterioration in the economic prospects of Dubai with a now explicit reliance on federal assistance.

At the same time, it has highlighted Dubai’s vulnerability in the current global economic environment given its reliance on volatile sectors such as real estate, trade, financial services and tourism, as well as its burgeoning debt and refinancing challenges.

Despite an increasingly visible deterioration in Dubai’s macro-economic condition due to its close integration with a recessionary global economy, Moody’s decision to confirm its ratings on DP World, DEWA, Jafz and DIFCI is based on all four companies’ highly visible and strategic mandates, which — in Moody’s view — carry significant relevance and importance not only to Dubai, but the UAE and the wider region. Accordingly, Moody’s believes that all four entities are central pillars of the country’s economic infrastructure and would therefore continue to benefit from federal support beyond the limited stand-alone resources of Dubai.

Furthermore, DP World, DEWA and Jafz all demonstrate fairly resilient fundamental credit profiles and are thus unlikely to require financial support under current planning assumptions. Companies have made material adjustments to their business plans in response to acute market challenges, seeking to conserve cash and minimise refinancing wherever possible. DIFCI is more vulnerable fundamentally, though this is partially mitigated by its position as a major regional financial hub. The combination of (1) underlying credit resilience despite adverse market conditions, (2) the appropriateness, and in some cases the significance, of revisions to individual business plans, and (3) national and regional strategic importance, which brings with it a very high likelihood of federal support, have resulted in ratings being confirmed at their present levels.

Although Moody’s believes that Dubai Holding Commercial Operations Group and Emaar Properties are both similarly highly likely to benefit from federal support mechanisms, the one-notch downgrade of both entities reflects the more severe fundamental strains facing their business models. Both companies are real estate master developers with hospitality businesses and are thus more immediately exposed to the Dubai real estate market. We also believe that both companies’ mandates are relatively narrower in scope compared to the companies that were confirmed. This is reflected in greater ratings differentiation, whereby Emaar’s Baa1 rating reflects the lower government stake (32%) in the company relative to Dubai Holding, which is wholly government owned. The support factored for both companies, however, remains high given their specified mandates within Dubai.

The outlook on all six companies’ ratings is negative. This reflects the prevailing uncertainty that exists within Dubai Inc., in particular the ongoing structural changes to some of Dubai’s core domestic sectors including real estate, and the potential for economic and market conditions to remain depressed over a longer period. Moody’s will thus continue to monitor both fundamental credit profiles and the relative positioning of financial support beneficiaries within Dubai Inc. in order to ascertain that existing ratings remain appropriately positioned.

The principal methodology used in rating these entities was “The Application of Joint Default Analysis to Government Related Issuers”, published in April 2005, which determines ratings on the basis of a company’s baseline credit assessment, as well as credit enhancement for exceptional government support. Accordingly, ratings were assigned by evaluating factors we believe are relevant to the baseline credit assessment of the issuers, such as i) the business risk and competitive position of the companies versus others within its industry, ii) the capital structure and financial risk of the companies, iii) the projected performance of the companies over the near to intermediate term, and iv) management’s track record and tolerance for risk. These attributes were compared against other issuers both within and outside of the companies’ core industries and ratings are believed to be comparable to those of other issuers of similar credit risk. Other methodologies and factors that may have been considered in the process of rating the issuers can also be found at www.moodys.com.