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Moody’s cuts ratings on two Dubai developers

AP Business Writer

Cairo, Egypt (AP) — A leading international credit-rating agency on Wednesday said it cut ratings on two prominent Dubai government-backed companies, but indicated the United Arab Emirates’ decision to step in and support the one-time Mideast boomtown had moderated the potential scope of the downgrades.

Moody’s Investors Service said ratings for developer Dubai Holding Commercial Operations Group LLC were lowered from A1 to A2 while Emaar Properties PJSC, which is building the nearly complete world’s tallest building in the heart of the city, saw its ratings cut from A3 to Baa1. Both are investment grade, though the outlook was negative.

The reductions were less than the two-notch downgrade the companies could have faced when Moody’s announced in February it was reviewing ratings on a total of six Dubai government-backed entities.

At the time, the fortunes of the UAE sheikdom known for its palm-shaped man-made islands, indoor ski slopes and soaring skyscrapers appeared to be waning amid a deepening global economic crisis. But the federal government, based in the neighboring city-state of Abu Dhabi, stepped in with a decision to buy up $10 billion in bonds issued by Dubai.

“What you can see here is that we have certainly acknowledged the manifestation of support that has become available from the federal government,” said Philipp Lotter, senior vice president in Moody’s corporate finance group. “That is a very important factor that one has to consider when looking at Dubai.”

Ratings for the four other entities — global port operator DP World, Dubai Electricity & Water Authority, trade zone and industrial park operator Jebel Ali Free Zone, and DIFC Investments, an arm of the emirate’s four-year-old international financial center — remained unchanged at A1, though the outlook was negative, Moody’s said.

The agency said its decision to hold those ratings steady was based on all four companies’ “significant relevance and importance not only to Dubai, but the UAE and the wider region.”

Lotter said the downgrades on the two property developers reflected broader concerns in the Dubai real estate market, which has seen property prices slump, projects shelved and companies announce layoffs as the global economic crisis hits a sector that has been a major engine for the emirate’s growth.

More so than some of its other Arab neighbors in the Persian Gulf, the UAE — in particular Dubai — has been hit hard by the global economic downturn. While Abu Dhabi has been able to bank on its more cautious growth efforts and its oil revenues, Dubai, with little oil resource, has staked its claim to fame on becoming a regional financial hub.

But that has left Dubai-backed companies vulnerable, particularly as the emirate is believed to carry about $80 billion in government and government-related debt, with about $15 billion to be refinanced this year and even more in 2010, according to analysts.

To shore up confidence, Dubai in February issued $10 billion in bonds as the first portion of a $20 billion issue. The UAE’s central bank quickly stepped in to buy up the first lot.

In another move aimed at boosting investor sentiment on the national level, Abu Dhabi is planning on a $10 billion global medium-term bond program. The size and maturity of the benchmark bonds have yet to be determined, but are being viewed with optimism by analysts and ratings firms.

Lotter said the move is not because Abu Dhabi — which holds what is believed to be the world’s largest sovereign wealth fund — needs money.

“What Abu Dhabi is doing here is creating a risk benchmark and also giving a very clear signal that quality issuers can issue on the markets despite a very tough environment,” he said. “A successful sovereign bond will provide that confidence to the market, that endorsement of Abu Dhabi’s ability to access … funds from the market.”

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