More Mergers in Dubai bring uncertainty

Following on from Emaar’s recent announcement that they will merge with selected parts of Dubai Holdings, another merger has just been announced  -  Standard & Poor’s Ratings Services said today that it had decided to keep its ‘A’ long-term credit ratings on Dubai-based real estate developer and hotel operator Dubai Holding Commercial Operations Group LLC after an announcement that the company will now merge with Emaar. This is the S&P press release:

“The CreditWatch status reflects our need to review our assessment of the likelihood of sufficient and timely extraordinary government support for DHCOG as a result of recent developments in Dubai and the company itself,” said Standard & Poor’s credit analyst Alf Stenqvist.

The existing ratings on DHCOG reflect its key role in executing part of the government of Dubai’s plan to develop the emirate into a major hub for commerce and tourism, and its 97.4% ownership by Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of Dubai. DHCOG is one of three major government-related masterplan developers in Dubai, and has been gifted land by the government to pursue key infrastructure and real estate developments in the emirate.

On April 30, 2009 we placed all Dubai government-related entities (GREs), including DHCOG, on CreditWatch with negative implications in line with our view of increased likelihood that the government of Dubai was considering the restructuring of debt in one of its key GREs, Nakheel (unrated). As articulated at the time, we reviewed all rated Dubai GREs because such a possibility stood at odds with our prior expectation that the government of Dubai was committed to providing extraordinary support to all its key GREs to allow them to service their respective obligations in a full and timely manner. This expectation had been factored into the ratings on Dubai GREs, providing significant uplift from their stand-alone credit profiles.

On June 26, 2009, it was announced that DHCOG intended tomerge its three real estate businesses (Dubai Properties LLC, Sama Duabi LLC, and Tatweer LLC) with (Emaar, BBB+/Watch Dev/–). Emaar is also one of the three government-related master developers in Dubai, being 32% owned by the government. Details of the merger are not yet public, and it is estimated that the process of consolidation will take about four months to complete.

The combination of Emaar and DHCOG’s real estate businesses would likely increase DHCOG’s importance in the development of Dubai, although we assume that the merged entity would not be fully owned by DHCOG or indirectly by the ruler of Dubai or the government. A merger would create possibilities for synergies and strengthen DHCOG’s position in the Dubai real estate market, which however is currently is experiencing a severe downturn. The benefit on DHCOG’s credit quality will also depend on the new entity’s capital structure.

The ratings could be lowered if, following a review, we believe that the likelihood of sufficient and timely extraordinary government support is lower than we currently assume. In resolving the CreditWatch listing we will reassess DHCOG’s importance to the government and the development of Dubai combined with its future ownership structure within the prospective combined entity. We will also review the impact of the prospective merger on DHCOG’s stand-alone credit quality, future business and financial strategies, and the capital structure of the merged entity. Standard and Poor’s

My thinking is that this will serve to add yet more confusion and uncertainty in the Dubai marketplace – with what little privately owned stock there is being gobbled up by government entities.