Dubai credit squeeze tightened as agencies go negative
Posted on 18 December 2008 with no comments from readersOrder my book online from this link
The credit squeeze in Dubai took a nasty turn yesterday with the ratings agencies S&P and Fitch announcing negative ratings for state companies and certain UAE banks.
S&P assigned a negative credit rating to six Dubai government entities: DIFC Investments, DP World, Dubai Holding Commercial Operations Group, Dubai Multi Commodities Centre, Jebel Ali Free Zone and JAFZ Sukuk.
Meanwhile, Moody’s has cut Abu Dhabi Commercial Bank, First Gulf Bank and Dubai Islamic Bank from stable to negative, and changed Dubai Bank from positive to stable.
Liquidity tight
Moody’s said the action was prompted by liquidity pressures, downward pressure on asset prices and anticipated profitability pressures from rising funding costs. The move will make it more difficult and expensive for these institutions to raise new funds and refinance existing debt.
Dubai has a total debt of $80 billion and has said it will have no problem servicing these borrowings. However, the credit squeeze clearly has implications for the ability to implement future projects, and there are reports of wide-ranging cutbacks.
So far Dubai has not had recourse to the UAE federation as the local lender of last resort, but in this context new finance could be forthcoming on a scale not available in most countries without printing money.
2009 challenges
Clearly 2009 is going to be a challenging year for Dubai and rationalization and consolidation look inevitable as even the most visionary plans are thwarted by lack of money.
The better news is that by axing the least financially viable projects and consolidating existing infrastructure Dubai will emerge leaner and fitter for the next expansion phase.
Eventually the money that flowed out of the country over the summer will return to buy up assets at depressed prices, and the credit cycle will resume on the back of this in-flow. But that could take most of 2009 at least and possibly a while longer.
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17 December 2008
Standard & Poor’s Rating Services said today that it had revised its outlook on Dubai-based property developer Emaar Properties PJSC (Emaar) to negative from stable. At the same time, we affirmed the ‘A-’ long-term corporate credit ratings.
“The outlook revision reflects a rapid weakening of the real estate markets in Dubai, and our uncertainties about the depth of the downturn and the pace of eventual recovery. A prolonged downturn could negatively impact our view of Emaar’s business risk, and it could also lead to deterioration in Emaar’s currently healthy financial position,” said Standard & Poor’s credit analyst Alf Stenqvist.
The ratings on Emaar continue to reflect the group’s important role and strong position in the Dubai property development market and its close relationship with, and 32% ownership by, the government of Dubai (not rated). The rating includes a two-notch uplift from the stand-alone assessment to reflect implicit support from the government of Dubai. The rating also reflects the group’s current strong cash flows, low debt leverage, and strong asset base. Constraining rating factors include the weakening of the Dubai real estate market, the concentration of the group’s operating cash flows in a relatively small number of large projects, and the group’s aggressive geographic expansion into markets with higher political and economic risk. On Sept. 30, 2008, the group had total interest-bearing debt of about UAE dirham (AED) 9.1 billion ($2.5 billion).
Emaar is one of the largest property developers in Dubai, with sales of AED17.6 billion in 2007. The group focuses on residential communities and has until recently benefited from high demand for properties in Dubai, which has been supported by the rapid economic growth of the emirate.
Emaar’s expansion in the Middle East and North Africa has so far offered only a limited cushion against the downturn in Dubai, and the company’s U.S. operations are loss making. Emaar has, however, recently completed a large shopping mall in Dubai, which should generate quite good and stable rental income in the years ahead.
The negative outlook reflects the weakening of real estate markets in Dubai, which if prolonged and more severe than we currently anticipate, could put pressure on Emaar’s cash flows and financial position, and subsequently could lead to a downgrade in the medium term.
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I don’t see things improving so quickly for Dubai, the reason being currently the big real estate players: developers, agents, investors, lenders have suffered, but people who are not linked at all have not yet had to come across severe pressure through real estate slump. The other sectors are suffering due to the global economic melt down. I feel the real estate downfall is going to impact other industries first quarter next year when highly rented apartments and mortgaged houses are going to be vacated as a beginning.