Abu Dhabi has ordered state-owned firms to aim towards having investment grade rankings without factoring in government support, as the latest part of the emirate’s drive to eliminate risks of a Dubai-style debt crisis emerging.
The move has come from the debt management office (DMO), an arm of the Department of Finance tasked with managing the state’s exposures through its government=related entities (GREs). “The DMO has told the GREs that they have to move towards being investment grade as a standalone entity,” says one source based in the emirate. “That’s what they have been told to work towards, although no time frame has been given,” adds another senior banker in Abu Dhabi. “So it is more about getting them to show that they are developing into robust, standalone businesses than trying to force them into doing something too quickly.”
Over the past year, the DMO has been focusing on getting borrowing by state owned firms under control. A report issued by the IMF in May said that Abu Dhabi GRE debt was $100bn, or around 45 per cent of the emirate’s gross domestic product (GDP). For the UAE as a whole, GRE debt was put at $185bn.
“Debt at these companies has gone from zero to $100bn in just a few years, so there is concern about making sure that this is under control,” says another Abu Dhabi-based banker.
|UAE debt breakdown|
|($bn)||As % of 2011 GDP|
|Government-related entity (GRE) debt||100.6||45.6|
|Dubai GRE debt||84.3||60.4|
|Total GRE debt||184.8||51.3|
Most Abu Dhabi GREs benefit from a significant uplift in their credit ratings because ratings agencies factor in a high degree of likelihood that the state will provide financial support if it has to. For example, without support from the state debt issued by Abu Dhabi National Energy Company (Taqa), would be regarded as junk bonds, according to rating agencies Standard & Poor’s and Moody’s Investors Service. Instead the company is A rated by Standard & Poors and A3 by Moody’s.
Other high-profile entities such as Mubadala Development Company and International Petroleum Investment Company (Ipic), which are rated Aa3 by Moody’s – or six notches above junk – also benefit from assumptions of significant shareholder support. A rating of the companies on a standalone basis is not published. Tourism Development and Investment Company (TDIC) is currently rated A1 by Moody’s and AA by both S&P and Fitch, although the ratings are equal to Abu Dhabi’s sovereign rating, as a reflection of how likely government support is thought to be. Without the support, TDIC would be a much less convincing investment case. In 2011, it received $10bn in bailouts from the government to keep it going.
“On a standalone basis Mubadala and Ipic would look a lot weaker, but TDIC would be weakest of them all. It will take a lot to make them all investment grade,” says one source at a UK-based asset management firm with significant Middle East exposures.
The DMO is understood to have communicated the new message to all GREs during the summer as part of its financial review and planning for 2013. Sources say it reflects the growing conservatism in the emirate, which has led to a strengthening of the DMO’s role. “The DMO now has an official role in risk management and overseeing all borrowing so that the Executive Council [Abu Dhabi’s governing body] can know the level of actual and planned borrowing at any time,” says the UK-based asset manager.
Earlier this year, the Executive Council sent a document to all GREs saying it was putting a cap on borrowing and giving the DMO power to block bond issuance by state-owned firms. It also set out more clearly than ever before that it would not be obliged to bailout firms that do not have an explicit government guarantee. A UAE-based banker says the document would “bring an end to firm’s leveraging up on cheap debt just because of who their owners were”.
Taqa has already announced that it is aiming to be an investment grade company and is trying to reduce its debt levels to meet that goal. Mubadala declined to comment, although a source close to the company confirmed that becoming investment grade on a standalone basis was part of the firm’s ambitions. The Department of Finance could not be reached for comment.