Moody's: UAE-subscribed bond issuance supportive for Dubai's ratings review
Yesterday, the federal government of the United Arab Emirates (UAE) announced that it had provided financial support for Dubai's government. This support was provided through the central bank, which purchased a $10 billion bond issued by the government of Dubai under a $20 billion programme. The senior unsecured bond carries a fixed interest rate of four percent per annum and has a five year maturity.
The federal news agency, WAM, stated: "this issuance will provide the Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations". This statement suggests that there will be no restrictions on how the Dubai government uses the proceeds from the bond.
Assuming that there are no such restrictions, this news is clearly supportive for the ratings of the six Dubai Inc. companies that are rated by Moody's. These are: Dubai Holding Commercial Operations Group (rated A1), DP World (A1), DIFC Investments (A1), Dubai Electricity & Water Authority (A1), Jebel Ali Free Zone (A1) and Emaar Properties (A3). The ratings of these companies were placed on review for possible downgrade on 2nd February 2009.
As explained in Moody's' Special Comment entitled "Dubai Inc: Credit Environment Update & Outlook", also published on 2nd February 2009, Moody's' assumption of a high likelihood of direct or indirect financial support for Dubai Inc companies from the federal government forms a core pillar of Moody's ratings analysis. The materialisation of this support, indirectly through the Dubai government, is therefore positive from a ratings perspective.
However, the fact that the Dubai government requires such a large amount of financial support is also a reflection of the serious challenges that Dubai's economy faces. Moody's concern over the impact of the global economic crisis on Dubai's open economy and business environment was the main driver behind placing the six Dubai Inc company ratings on review for downgrade.
Hence, Moody's ongoing ratings review, which is expected to be concluded shortly, will consider to what degree the erosion of Dubai's intrinsic economic strength and the fundamental creditworthiness of each of the six rated Dubai Inc companies is offset by the materialisation of financial support from the federal government.