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.