International credit rating agencies remain concerned about the extent of Dubai Inc's exposure to the emirate's depressed property market.
Fitch Ratings and Moody's Investors Service issued reports on Dubai Holdings Commercial Operations Group (DHCOG) highlighting its property problems.
DHCOG is a unit of the Dubai Holding conglomerate, which is owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.
DHCOG owns the Jumeirah hotels and leisure business, and the Tecom business parks and free-zone operations, and it has extensive property interests in the emirate. Moody's left its rating of DHCOG unchanged, but Fitch downgraded its assessment. Fitch lowered its long-term issuer default rating and senior unsecured rating to "B" from "B plus". The outlook was changed to "negative" from "watch negative".
Moody's maintained its ratings of some US$2.14 billion (Dh7.86bn) of DHCOG debt, and its negative outlook, but indicated the possibility of an upgrade this year.
In its report, Fitch said its downgrade reflected its "review of DHCOG's business plan, leverage, operating results, liquidity and financial flexibility".
"The company performed within our expectations in 2009 and 2010. We expect that the market prospects have deteriorated further, especially for Dubai Property Group operations," Fitch said. Martin Kohlhase, Moody's lead analyst on DHCOG, shared concerns about the group's property exposure but added: "We believe there is value in DHCOG's solid asset base from recurring revenues stemming largely from Jumeirah and Tecom, but also from [Dubai Property Group's] rental income.
"In addition, DHCOG is moderately leveraged, which is supportive of the B2 corporate family rating (CFR). The group's core assets - hospitality, free zones and the properties' rental portfolio - have performed well throughout the downturn and remain at the heart of the economy.
"One of our focus areas remains the winding down of the Dubai real estate exposure by collecting down payments, [and] managing contractors' payables and deliveries, which continues to represent the most pressing operational risk factor," said Mr Kohlhase.
In addition to the CFR, Moody's confirmed its probability-of-default rating and its multi-currency instruments ratings at "B3".
But the agency held out the prospect of an upgrade in its ratings later in the year, when DHCOG is expected to repay some $240 million of bonds and take action to resolve its problems in residential property.
"The outlook could be stabilised when DHCOG meets its financial obligations in time and in full, and winds down its real estate projects, while further strengthening its cash flow profile," said Mr Kohlhase. Fitch wrote: "We expect that DHCOG should be able to plug their financing gap from non-core asset disposals (mainly from property assets) in the coming five years, the proceeds of which will be applied to strengthen its financial structure."
Dubai Holding does not comment on ratings reports, but a source close to the company said it was on target to repay the bonds on schedule in July.
Moody's identified a number of possible disposals from among DHCOG's non-core assetssuch as its holdings in du, Axiom Telecom and Tunisie Telecom, worth about Dh9.2bn at the end of 2009, compared with total group debt of about Dh14bn by the end of last year.
However, a source close to the company said it was not considering the sale of these or other core assets such as the Jumeirah Beach Residence or the Business Bay developments.
But other property assets might be sold at the right price.
Dubai International Capital, also owned by Dubai Holding, recently agreed on a financial restructuring. But Dubai Group, which holds most of the conglomerate's financial assets, is still in talks with creditors.