Fitch Ratings has downgraded Dubai Holding Commercial Operations Group LLC’s (DHCOG) long-term issuer default rating (IDR) and senior unsecured rating to ‘B’ from ‘B+’, removed all ratings from rating watch negative (RWN) and assigned to the long-term IDR a negative outlook.
itch has also affirmed DHCOG’s Short-term IDR at ‘B’ and senior unsecured recovery rating (RR) of ‘RR4′, which represents Fitch’s RR cap for the United Arab Emirates (UAE). The rating action also affects Dubai Holding Commercial Operations Group LLC’s medium-term notes’ (MTN) senior unsecured rating, which has been downgraded to ‘B’ from ‘B+’ and ‘RR4’ affirmed.
The rating actions reflect Fitch’s review of DHCOG’s business plan, leverage, operating results, liquidity and financial flexibility. DHCOG performed within Fitch’s expectations in 2009 and 2010. Nevertheless, Fitch expects that the market prospects have deteriorated further, especially for Dubai Property Group (DPG) operations. DHCOG benefits however from contracted rental income from TECOM Investments LLC, and, to a lesser extent, from DPG, in addition to Jumeirah Group hospitality income.
“The negative outlook reflects the short-term maturities repayment risks that DHCOG faces over the coming 12 months (namely CHF250m ($240m) notes due in July 2011 and $500 million notes due in February 2012), as Fitch views DHCOG’s ability to refinance externally as limited. The outlook also captures the agency’s expectation that all assets will see declining revenues over at least the next three years, with DPG being the most affected and the hospitality being affected to a lesser degree,” Fitch in a statement said.
Based on Fitch’s rating case, the company’s liquidity profile remains weak, mainly due to the maturing MTNs and the negative free cash flow, which is calculated before the asset disposal. DHCOG operates with no long-term committed undrawn facilities. However, Fitch expects that DHCOG should be able to plug their financing gap from non-core asset disposals (mainly from DPG assets) and disinvest plan in the coming five years, the proceeds of which will be applied to strengthen its financial structure.
“While details of the disposals have not been disclosed, DHCOG owns a sufficiently wide array of assets and investments to make the proceeds target achievable. If successful, the company’s de-leveraging plan could help return its outlook to Stable from Negative. Additionally, disposals would allow DHCOG to focus on its core business and implement its development plan. Conversely, the group’s inability to execute its asset/divestment plan to further de-leverage would have a negative impact on the rating,” it added.
DHCOG’s standalone rating is now ‘B-‘, reflecting the company’s weak underlying real-estate business and financial risk, but includes an assumption of ongoing operational government support by way of direct cash and land grants. DHCOG’s Long-term IDR is one notch higher (at ‘B’) than the standalone rating of ‘B-‘ to reflect Fitch’s view of prospective support for DHCOG from the Dubai Government in case of ultimate need. DHCOG’s loan-to-value ratio and gearing remain satisfactory for its current rating level during the projected period and a covenant breach appears unlikely.
The group is one of the major government-related masterplan developers in Dubai, and has been gifted land by the government to pursue key infrastructure and real estate developments in the emirate. Dubai aims to be a regional hub for commerce, tourism and leisure and DHCOG is central to the long-term attainment of these strategic goals. The government has provided DHCOG with support so far and Fitch expects that an element of operational support will be provided in the future.
DHCOG is effectively 97.4%-owned by Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and ruler of Dubai.