A report published today by Standard & Poor's Ratings Services answers questions related to its view on the likelihood of extraordinary government support for Dubai-based government related entities (GREs), and what factors may affect this in the future (see "What Factors May Affect S&P's View Of The Likelihood Of Extraordinary Government Support For Dubai-Based GREs?").
Specifically, the report answers the following questions:
-- What are Standard & Poor's current expectations regarding the likelihood of extraordinary support from the Government of Dubai for its GREs?
-- What track record does the Government of Dubai have in supporting its GREs?
-- To what extent are the ratings affected by Dubai's challenging debt burden?
-- How might the GRE issuer credit ratings be affected by a restructuring of debt in an unrated GRE?
-- How might the Nakheel repayment affect the GRE issuer credit ratings?
-- Does Standard & Poor's believe the Government of Dubai has the resources to support its GREs?
Standard & Poor's estimate of the current total amount of debt owed by the Dubai government and its various GREs is $80-$90 billion, although the margin of error is significant given the lack of official statistics. More significant than the quantity of debt outstanding, however, is the relatively short-term structure of the debt. According to approximate data contained in the report, cumulative repayments for Dubai-based GREs over the coming three years are significant and amount to nearly $50 billion, which is equivalent to around 70% of Dubai's current estimated GDP. The majority of this debt will come due in 2011 and 2012.
The report also discusses Standard & Poor's belief that a track record is an important indicator of a government's propensity to provide extraordinary support to its GREs.
"We see a long track record of "ongoing" government support to Dubai-based GREs in the form of land grants, provision of bespoke infrastructure to support projects, and the like," Standard & Poor's credit analyst Farouk Soussa said. "However, in terms of extraordinary support to GREs to help them avoid financial distress, the track record is much shorter, in our observations, given the relative health of the Dubai economy and the ease of obtaining market financing prior to mid-2008. That said, there have been several instances of extraordinary government support in the past year."
While such extraordinary measures underpin Standard & Poor's view of the likelihood of further government support, at the same time it has also observed a lack of specific assurances with respect to the full and timely support of upcoming repayments at key GREs.
"More generally, we consider the lack of transparency with respect to the government's strategy in dealing with the financial obligations of its GREs as creating significant uncertainty," Mr. Soussa said. "To the extent that the ratings are supported by assumptions and expectations regarding the likelihood of government support, as opposed to concrete assurances and guarantees by the government, we consider this a significant weakness in the creditworthiness of Dubai-based GREs."
The report states that the likelihood that the Government of Dubai will be required to provide extraordinary financial support to help at least some of its GREs meet their financial obligations on a timely basis is significant. Given the finite nature of resources available to the government for this purpose, Standard & Poor's believes that relative to the past conditions of economic boom and easy credit, providing government support will be more costly and the government may be required to distinguish among potential recipients more than assumed in prior years. The report notes that this has been an important factor in the context of Standard & Poor's negative ratings actions on Dubai-based GREs over the past year.
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