Moody’s downgrades UAE government-related issuers

04 March 2010

Ratings agency raises concerns over strength of sovereign support

International ratings agency Moody’s has downgraded seven government-related issuers in Abu Dhabi and the UAE, some by several notches, as a result of concerns over their future performance and the ability of the federal government to support them.

The Abu Dhabi government is playing a key role in helping Dubai pay off its debts, estimated at about $85bn, and supplied $20bn to its neighbouring emirate in 2009. 

Ratings affected by today’s announcement include the following:

  • Mubadala Development Company (Mubadala): Aa3/Prime-1, stable outlook, from Aa2/Prime-1
  • International Petroleum Investment Company (Ipic): Aa3/Prime-1, stable outlook, from Aa2/Prime-1
  • Tourism Development & Investment Company (TDIC): A1, stable outlook, from Aa2
  • Abu Dhabi National Energy Company (Taqa): A3/Prime-2, stable outlook, from Aa2 / Prime-1
  • Emirates Telecommunications Company (Etisalat): Aa3, stable outlook, from Aa2
  • Dolphin Energy (Dolphin): A1, stable outlook, from Aa3
  • Aldar Properties (Aldar): Ba1, negative outlook, from Baa2

For Mubadala, Ipic and the TDIC, the ratings agency acknowledges that all three entities remain heavily funded directly by the government, but notes it has decided to introduce a moderate distinction between their ratings and that of the sovereign, “given that no explicit formal agreement exists obligating the government to support them under all circumstances”.

This has therefore resulted in the downgrade of one notch in the ratings of Mubadala and Ipic to Aa3 and downgrade of two notches in the ratings of TDIC to A1.

“The distinction in the rating of TDIC relative to Mubadala and Ipic reflects TDIC’s weaker fundamental creditworthiness, given its high exposure to large-scale real estate projects that are in earlier stages of development, albeit of very high strategic value,” says the agency.

Moodys has also decided to introduce a greater level of distinction between the ratings of Taqa, Dolphin and Aldar, and those of the government, thus resulting in downgrades.

Taqa’s ratings have been lowered to A3 because of the lack of continuing and regular funding from the government and a greater commercial orientation of its business activities. This includes new substantial foreign engagement. Moodys notes: “Whilst exceptional and timely support remains high, we believe it cannot be regarded as absolute.”

The downgrade of Aldar’s ratings to Ba1 and Etisalat’s ratings to Aa3 also reflects Moodys expectations that government support to these companies will be reduced going forward.

The agency also raises concerns over Aldar’s future financing needs for which it says, “the support mechanisms are less certain” as well as the company’s “exposure to the volatile real estate market.”

In September 2009, the Dubai government issued a prospectus to help promote its planned $2.5bn sukuk (Islamic bond), in which it distanced itself from an estimated $63bn of debts run up by companies it owns or in which it holds a stake (MEED 27:3:10).

“The Dubai government is under no obligation to extend support to any government-related entity, either directly or through the Dubai Financial Support Fund [the fund created to distribute the first $10bn of a planned $20bn bond programme],” stated the sukuk prospectus.

In November 2009, state-linked indebted conglomerate Dubai World announced that it was seeking a six-month standstill on $22bn debt.

Intervention at the last minute from neighbour Abu Dhabi staved off a default on a $3.52bn Nakheel bond payment on 14 December. However, further financial help is conditional on a standstill agreement, the terms of which have not yet been finalised.

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