Ratings lowered for two government-related firms in Dubai

Moody's Investors Services has downgraded the ratings of two government-related companies in Dubai because of their exposure to the property market. The agency confirmed the ratings of four others.
Emaar Properties was downgraded to "Baa1" from "A3" and Dubai Holding Commercial Operations group was downgraded to "A2" from "A1". The outlook on both companies is negative. The ratings were cut by one notch each, bringing Emaar's rating just two levels above "junk" status.
"The one-notch downgrade of both entities reflects the more severe fundamental strains facing their business models," said Philipp Lotter, the senior vice president of Moody's Middle East operations.
Emaar derives the bulk of its revenues from Dubai, where it is building the world's tallest tower and has built one of the world's largest shopping malls. Dubai Holding operates some of the UAE's most active developers, including Dubai Properties and Tatweer.
"Both companies are real estate master developers with hospitality businesses and are thus more immediately exposed to the Dubai real estate market," said Mr Lotter. "We also believe that both companies' mandates are relatively narrower in scope compared with the companies that were confirmed."
Analysts say that the reason for the downgrades is the fragility of Dubai's property and mortgage markets.
"It comes down to the real estate slowdown and ongoing structural changes in the companies as a result," said Ali Khan, the managing director at Arqaam Capital. "We are seeing signs of stability in property prices and expectations are rising on the back of the Amlak-Tamweel merger; while this isn't enough to completely recover the mortgage market, I don't see these downgrades reversing positive investor sentiment."
Analysts say the downgrades did not come as a surprise, particularly in the case of Emaar.
"Emaar is a prime example; revenues are likely to drop off sharply given the absence of land sales and project deliveries, not to mention the John Laing business in the US," said Fahd Iqbal, a research analyst at EFG Hermes. "Clearly, they're going to have a difficult year ahead."
Companies whose ratings were confirmed by Moody's include DP World, Dubai Electricity and Water Authority (DEWA), Jebel Ali Free Zone and DIFC Investments, all rated "A1" with the outlook on ratings negative.
Credit rating analysts say the provision of federal funds to Dubai through the US$20 billion (Dh73.46bn) bond package moderated the ratings.
"Moody's Dubai Inc ratings potentially have a high transition risk given their reliance on an assumption of generous and timely federal support," said Tristan Cooper, the vice president and senior analyst with Moody's sovereign risk group who is based in Dubai. "Without that support, the ratings would be much lower."
Despite the downgrades, Dubai state-owned firms plan to raise almost $3bn in loans this month as signs appear that lending conditions are improving. DEWA is negotiating a $2.2bn multi-currency loan, while the Dubai Civil Aviation Authority is expected to receive $650 million to repay $1bn in maturing debt.
* with agencies
shamdan@thenational.ae