Moody's Investors Service has assigned long-term foreign and local currency ratings of A3 to Emaar Properties PJSC ("Emaar"), the Dubai-based property developer. The outlook of the ratings is stable. This is the first time that Moody's has assigned ratings to Emaar.
"Emaar's ratings are underpinned by the group's solid operational track record as Dubai's most established property company, as well as the good cash generation and low leverage that currently characterise its financial profile", says Philipp Lotter, Dubai/DIFC based Vice President -- Senior Credit Officer and lead analyst for Emaar. "However, ratings also incorporate the potential softening of the Dubai property market, to which Emaar is heavily exposed despite growing international expansion", Lotter adds.
Emaar's A3 ratings reflect the group's intrinsic credit strength and the additional enhancement that can be derived from the financial strength of the Emirate of Dubai, which currently owns a 32% stake in the company, which is likely to grow to over 50% following a recent share-for-land transaction with Dubai Holding. Accordingly, Moody's views Emaar as a government-related issuer (GRI) and determines its rating in line with its methodology for such issuers.
Emaar's ratings reflect its leading position in the Dubai residential market, strong financial profile and conservative risk-management policy as well as the institutional support it benefits from, albeit mitigated by the cyclical nature of the homebuilding industry, the group's medium scale, large exposure to a single economy and ambitious expansion strategy.
Ratings are supported by its strong brand name and position as a leading developer in the Dubai residential market, where it holds a market share of over 20%. Furthermore, ratings factor in Emaar's conservative capital structure, thus resulting in robust interest cover and strong liquidity.
The group's credit quality is also supported by its conservative risk-control guidelines aimed at ensuring that the amount of speculative development remains limited. This is achieved by (i) pre-selling most projects, (ii) collecting progress payments against stages of completion and (iii) phasing out the development programmes. Finally, Emaar's business model benefits from a fairly high level of direct or indirect institutional support both in Dubai and abroad, given its important role in host governments' and local authorities' strategies to develop a high-quality residential property supply.
Ratings however are constrained by the cyclical nature of the property industry, and the company's exposure to Dubai's property market, where 85% of Emaar's 2006 EBITDA was generated, although greater geographical diversification could prove to be a mitigant over time. Moody's notes that Dubai's housing demand is driven by non-UAE nationals, who account for over 80% of the total population and whose presence in the country results from the performance of the overall economy. Emaar's ratings also reflect its ambitious international expansion strategy which will absorbsignificant management resources and entails material project and execution risk.
Emaar's rating outlook is stable, reflecting Moody's view that, despite rising investments, the group will maintain a strong financial profile. Moody's has factored some financial flexibility into the rating but would expect Emaar's net debt to capital not to materially exceed 25%, in line with the group's internal target.
Moody's also notes Emaar's relatively high level of debt located at the subsidiaries, mostly owing to the debt raised by WL Homes, a US company it acquired in 2006, on a secured basis. At present, the rating agency has however refrained from notching any senior unsecured debt for either structural or legal subordination given the sovereign support assumption embedded within the rating, which benefits in priority the creditors located at the parent company level.
Whilst Emaar's fundamental credit quality is commensurate with a baseline credit assessment of 11 (on a scale from 1 to 21), credit uplift to A3 is achieved by the high sovereign support that Moody's factors into Emaar's ratings. This view is underpinned by (i) the high reputational risk for the government of Dubai of Emaar defaulting on public obligations given its status as Dubai's flagship property company and (ii) Emaar's strategic importance owing to its position at the forefront of the government's economic strategy to develop the Emirate into a regional hub for financial services, IT, tourism and trade. Given the high tolerance for state support in the UAE, Moody's believes that the government of Dubai would likely provide direct and indirect support to the group to avert a default on its financial obligations. Moody's support assumption reflects the view that the government of Dubai will retain a material interest in Emaar going forward, and indeed is supported by the recent announcement to provide additional land to Emaar in exchange for a stake in the company by Dubai Holding, which is owned by Dubai's Ruler, Sheikh Mohammed bin Rashid Al Maktoum.
Moody's also factors high dependence between Emaar and the sovereign into its ratings, although Dubai's revenues are relatively independent of the housing market and the likelihood that, in line with its strategy, Emaar will seek to expand its activities outside the UAE.
Based in Dubai, United Arab Emirates (UAE), Emaar Properties PJSC ranks as the largest developer of condominiums and villas in Dubai with an estimated market share of around 22%. The company's main shareholder is the government of Dubai, with a 32% stake. In 2006, Emaar generated revenues of USD3.8 billion.
