Standard & Poor's Ratings Services today said it had placed the ratings on the following Dubai-based government-related entities (GREs) on CreditWatch with negative implications:
1. DIFC Investments LLC,
2. DP World Ltd.,
3. Jebel Ali Free Zone (FZE),
4. Dubai Multi Commodities Centre Authority (DMCC),
5. Dubai Holding Commercial Operations Group LLC (DHCOG), and
6. Emaar Properties PJSC (collectively, "the Rated GREs").
In addition, we have placed the notes issued by Thor Asset Purchase (Cayman) Ltd. (Thor), which are securitized by cash flows from a revolving pool of existing and future receivables originated by Dubai Electricity and Water Authority (DEWA; not rated), as well as the notes issued by JAFZ Sukuk Ltd. (collectively, "The Notes"), on CreditWatch with negative implications.
"The CreditWatch placements reflect our opinion of the likelihood of downgrades of the Rated GREs and The Notes if the potential for extraordinary government support to the Rated GREs and The Notes is not affirmed by the government of Dubai," Standard & Poor's credit analyst Farouk Soussa said. "The need for Dubai government support is potentially increasing in the face of deteriorating fundamentals for some of the Rated GREs."
"The action results from our learning that a review of debt strategy at Nakheel (not rated), a material subsidiary of government-owned Dubai World (also not rated) and a key Dubai-based GRE, may include the possibility of a debt exchange. Recent media reports indicate that Nakheel is opening a dialogue with existing holders of its $3.5 billion sukuk coming due in December 2009, with a view to restructuring the debt."
Standard & Poor's has discussed these reports with Dubai World and has been told that "all options" in dealing with outstanding liabilities are being considered as part of an ongoing review, including a restructuring.
Standard & Poor's has also invited comment from the government of Dubai, which has declined to either refute the possibility of a debt restructuring at any of its Rated GREs or to provide clear assurances that all debt obligations of the Rated GREs will be met in a full and timely manner as per their original terms.
The primary reason the mere possibility of a debt restructuring in an unrated Dubai-based GRE has been sufficient to trigger a review of all our Rated GREs and The Notes is due to the fact that such a possibility stands at odds with our prior expectation that the government of Dubai is committed to providing extraordinary support to its key GREs, including the Rated GREs, in order to allow them to service their respective obligations in a full and timely manner. This expectation is based in part on repeated representations to Standard & Poor's and to the public by senior government officials and other highly placed individuals, that the government of Dubai is committed to providing such extraordinary support.
"In accordance with our published criteria, a GRE is rated between the inclusive bounds formed by the GRE's stand-alone credit profile and the government rating, with the placement along this rating spectrum a function of our assessment of the potential for extraordinary government support (see "Rating Government-Related Entities: A Primer," published on June 14, 2006, on RatingsDirect). All of the Rated GREs reflect government creditworthiness more than stand-alone credit profiles, though this may shift should the government's support commitment ebbs. In our view, the consideration of a debt restructuring in any key GRE, particularly if it were deemed to be "distressed", increases the uncertainty as to Dubai's intention to provide adequate support in times of stress. "
"At this stage, we have not had confirmation as to Nakheel or the government's intentions with respect to Nakheel's outstanding sukuk. The CreditWatch placement will hold for the duration of our review, which will focus on confirming these intentions, and then assessing the impact this may or may not have on our view of the likelihood of extraordinary government support with respect to The Notes, and each Rated GRE and its respective obligations," Mr. Soussa said. "We will resolve the CreditWatch placement once the analysis is complete. There is a significant likelihood that the review may result in the downgrade of one or more Rated GREs or The Notes by one or more notches, depending on our assessment of the likelihood of support on a case-by-case basis, and on the stand-alone creditworthiness of each Rated GRE and its respective obligations."