falling debt ratings will hurt Dubai companies further

We hear that Moody’s Investor Service, a credit ratings agency that assesses credit risks in relation to corporate debt issuers and sovereign nations is considering dropping its debt credibility ratings for six of Dubai’s major companies that enjoy strong state backing. The companies mentioned are:

1. Emaar
2. DP World
3. DIFC Investments
4. Dubai Holding Commercial Operations Group
5. Dubai Electricity and Water Authority
6. Jebel Ali Free Zone.

Currently Moody’s debt rating for Emaar is A3. Emaar’s share value has dropped approximately 17% in the past 12 months. The rest of the bunch are currently on A1 ratings. The re-rating is likely to bring all six down a notch or two.

Moody’s cites the deteriorating macroeconomic outlook for the region, and says Dubai has been hardest hit, due to its dependence on cyclical sectors such as tourism, property and financial services.

The re-ratings will mean of course that the already cash strapped corporations will find it more difficult to raise new funds or renew finance, and where they are able to get finance that will come at a higher cost due to the perceived increase in risk in lending to these entities.

This could also not have come at a worse time for the government of Dubai which is currently running a debt of around $80billion.

The government claims to own $90-$95 billion in assets and therefore says it is more than able to meet its debt obligations. However statistics are hard to come by, and fiscal accountability even more so. Hence these claims are almost impossible to substantiate independently. With oil prices down more than $100 from their 2008 highs and now the falling real estate asset valuations across the region, Moody’s senior vice-president in corporate finance, Philipp Lotter says “We don’t know what these assets are,” and “their liquidity cannot be taken for granted.”


What it means for Emaar and co.

The state backed real-estate companies may well find all their avenues of finance drying up, i.e.
a) diminished state funding due to factors mentioned above
b) non-existent retail investors who previously bought off-plan to fund build stages,
c) drying up of external funding due to global liquidity squeeze, as well as unfavourable terms on any funding secured as mentioned above.

This will lead in the short term to a reduction of finished units coming online. Any that are released to the market will require generous price reductions and/or incentives to stand a reasonable chance of shifting them in the current climate. These diminishing returns from sales will feed into the vicious circle of diminishing build capital, leading to more development freezes and job losses and further reduction in ability to bring completed units online.

It looks like Emaar and the rest of the club can expect their profits to be creamed in 2009 – 2010.

Whether the Dubai government will be in a position to nurse them through it, we shall wait and see. Much will depend on how much buddy and neighbour Abu Dhabi will be willing to lend them.

Then again there is always the millions belonging to crime lords that needs laundering. We’re not suggesting that such wealthy individuals are encouraged into Dubai or accepted there with open arms. However nor do they appear to be rooted out and removed. The British tabloid paper, the Mirror, reports in this article that “Crime bosses are fleeing to the United Arab Emirates state because there is no extradition treaty with the UK. They are also using the property market there as an easy way to launder their millions.” So maybe there will be at least one group of investors that Emaar and co. can rely on, even in the downturn.

As possible investors in Dubai ourselves, we shall be making sure we are sitting on our hands for most of this year, with hands glued to the chair just to make sure, and chequebooks stashed in a time-locked safe set to open in 12 months time.

That used to be the oasis where Dad proposed to Mom

Unfortunately Dubai is no laughing matter now, especially not for the property investors from all over the world who now stand to lose a great deal. A friend currently working in Dubai sent his woes in an email. This one line sums it up “sh*t has started to hit the fan over here in Dubai”.

Several major Dubai property developers have begun laying off staff, and others are reviewing their recruiting needs as the available global finance becomes thin. Although hard statistics are difficult to come by for the region, a case in point is Emaar who is considering job cuts in the wake of the tumbling market. To keep you in perspective Emaar is the Gulf region’s largest property developer by market value, 32% owned by the Dubai government and is the developer behind the world’s tallest tower, the Burj Dubai.

Emaar shares were down nearly 80% in 2008 to 3.19 AED a share. Realtors are identifying worrying trends of rapidly declining house prices, a stagnant resale market, the inability of off-plan property investors to keep up with their payment schedules, a marked decline in hotel occupancy rates and wage and hiring freezes in property companies. To make matters worse, they have highlighted the government’s indebtedness [Yes Dubai is not as rich as you thought - it's Abu Dhabi which still has oil]. Dubai has borrowed heavily in recent years to finance all of the physical infrastructure needed to support its construction trend. So much is the fear of a Dubai Doom that the UAE President, His Highness Shaikh Khalifa Bin Zayed Al Nahyan had to reassure the people of the UAE that their economy is supported by a healthy and robust national banking system [do you believe in a healthy bank these days?! Lol and chuckle]. A royal effort indeed to save the Dubai Dream.

Still phenomenal projects are being announced in the Dubai heartland similar to existing ones such as Burj Al Arab and the Indoor Skiing Resort in the Emirates Shopping Mall, but I don’t see anyone buying these new projects. Local Urdu and Hindi channels in the UK are saturated with Dubai Exhibitions and to be honest they sound somewhat desperate. I know someone who bought property two years back in Dubailand and though on paper the value has gone up he has no buyers interested in taking it off his hands. There is virtually no resale market at all for these new apartments. Once you buy one, you are stuck with it.

The new Atlantis - perhaps an apt name?

[this article originally published on our sister site www.ultranomics.com by jq]