Paris: Standard & Poor’s Ratings Services assigned its BBB- long-term corporate credit rating to Dubai-based real estate group DIFC Investments LLC (DIFCI). The outlook is stable.
“Our rating reflects DIFCI’s stand-alone credit profile (SACP), which we assess at bb- and three notches of uplift due to our view of a very high likelihood of extraordinary support from the government of Dubai,” S&P in a statement said.
DIFCI is the developer and commercial operator of Dubai International Financial Center (DIFC), a federal financial free zone administered by Dubai government. DIFCI owns, leases, and develops a portfolio of prime quality income-producing office assets and manages revenue-generating operations.
Under the current administrative structure, DIFCI is an integral and non-replaceable entity of DIFC Authority (DIFCA), and its activities are unlikely to be replaced by any private entity within our forecast horizon for the next two years.
“Our assessment of the SACP reflects our view of DIFCI’s business risk profile as “fair” and its financial risk profile as “aggressive,” according to our criteria. We consider DIFCI to be a government-related entity (GRE). Under our methodology for rating GREs, we factor into the long-term rating on DIFCI three notches of uplift based on our assessment that there is a “very high” likelihood that DIFCI would receive timely and sufficient extraordinary support from the Dubai government if faced with financial distress.”
“We believe Dubai’s real estate market will remain supported by high GDP growth of 4.0%-4.5% in 2014 and 2015, and that the government’s initiatives to encourage foreign companies to set up in Dubai will continue benefiting DIFCI.
“DIFCI enjoys a strong competitive advantage, in our view, because it manages the leading financial hub in Middle East, North Africa, and South Asia (MENASA), the sixth most important financial center in the world, and the only financial free zone in the Emirate of Dubai. This is further supported by DIFC’s function as a key vehicle for the government of Dubai in its goal to diversify its economy. Moreover, we believe DIFC’s regulatory framework provides the group’s assets with a high degree of attractiveness for potential tenants by offering a free-trade zone well designed for financial services. This includes an international legal system, 100% foreign ownership, zero tax rates on income and profits for 50 years from inception, and freedom to repatriate capital and profits without restrictions. We view positively the tenants’ good quality (mainly international firms) and the group’s low exposure to a single counterparty, as no tenant represents more than 2.5% of its total lease revenue.
“In our assessment of DIFCI’s business risk profile, we also capture the group’s aim to continue focusing on low-risk rental and fees collection, shifting from exposure to higher-risk financial investments. We understand these noncore assets, which made losses in the past, have been strongly divested over the last two years. Currently, these noncore assets represent no more than 8% of DIFCI’s total asset value. We believe the group maintains a moderate and controlled exposure to its development activities, which we estimate at less than 10% of its total asset value. We also acknowledge that
DIFCI has additional sources of revenue from property and group’s registration rights (through DIFC Registrar of Companies [RoC] and DIFC Registrar of Real Property [RoRP]) that further support revenue stability.”
“The stable outlook reflects our expectations that DIFCI will likely continue generating stable and predictable income, mainly from real estate leases, supported by its strong market position and still-favorable market conditions in the Dubai economy over the next 24 months. We anticipate that DIFCI will pursue gradual divestments of noncore businesses while maintaining moderate exposure to its development activities. We believe an FFO-to-debt ratio of over 7% and EBITDA interest ratio of more than 1.8x are compatible for the current rating. The outlook also factors in our assumption that the ownership structure and the role of the group in the Dubai development strategy will not change over the next two years, which leads us to anticipate that there is a “very high” likelihood that DIFCI would receive timely and sufficient extraordinary support from the Dubai government.
We could consider a positive rating action if DIFCI’s cash flow generation improves thanks to stronger rental earnings, such that EBITDA to interest and FFO to debt increase sustainably beyond 2.4x and 9%, respectively.
We could consider lowering our rating on DIFCI if the group fails to maintain an adjusted EBITDA interest ratio of more than 1.8x or “adequate” liquidity. This would likely result from a sharp weakening of demand for real estate office space in Dubai or the group’s adoption of a more aggressive policy toward the funding of its development projects.
We could also lower the rating if we believed DIFCI’s very important role for and very strong link with the government of Dubai weakened. This could be the case if, under stress, the government were faced with material funding needs of many of its GREs and were not able to prioritize the support to DIFCI against other potential recipients. Rapid deterioration of DIFCI’s SACP would also signal the government’s inability or unwillingness to support, although this is not in our base-case scenario, and this would prompt a weaker assessment of the link between the government and the group,” S&P added.