From the Wall Street Journal: Moody's Downgrades Five Dubai Companies

I just read this very interesting article from the Wall Street Journal.

Moody's Downgrades Five Dubai Companies

By MARIA ABI-HABIB

DUBAI -- Moody's Investor Services, the credit ratings agency, Wednesday downgraded five major Dubai-government-controlled companies after the emirate's finance department relinquished its obligations to the firms' debts in late October.

In a statement, Moody's said it downgraded Dubai Holding Commercial Operations Group LLC, or DHCOG, to Baa1 from A3, two notches above junk level. DHCOG is effectively owned by Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of Dubai and vice president and prime minister of the U.A.E.

DP World, Dubai Electricity & Water Authority and DIFC Investments saw their issuer and debt ratings downgraded to A3 from A1, while Jebel Ali Free Zone, or JAFZ, had its rating lowered to Baa1 from A3. Emaar Properties' rating was left untouched at Baa1, according to Moody's.

The rating outlook for the first four companies is negative, while DHCOG and Emaar are maintained on review for downgrade, Moody's said in the statement. "The downgrades follow recent disclosures of increased conditionality around when support could be provided to these GRIs [government-related issuers]," Moody's said.

"This includes the specific criteria that will be considered by the recently established Dubai Financial Support Fund when assessing whether financial assistance should be provided." The Dubai Financial Support Fund manages Dubai's debt obligations.

Dubai's government is under no obligation to extend support to any such government-related issuers either directly or through the support fund, Moody's added.

"Moody's is therefore making a greater distinction between its view of the creditworthiness of Dubai's GRIs and that of the Dubai central government, which is itself viewed by Moody's as benefiting from support from the U.A.E. federal government," the agency said.

Dubai's government-related entities are believed to make up the bulk of the emirate's debt pile. Last month, Dubai's government launched global roadshows to market a $6.5 billion debt program, whose prospectus stated that the government has no obligations to the debt of its "government-related entities."

According to the prospectus, "direct debt" of the Dubai government stands at $19.4 billion, much lower than the $80 billion of total debt the government and its government-related entities are believed to owe. DP World had just under $60 billion in liabilities at the end of last year, according to its balance sheet.

In February, a $20 billion bond program was launched by Dubai, to help pay back government and government-related entities' debt. The first $10 billion tranche was subscribed to by the United Arab Emirates' central bank in Abu Dhabi.

Government officials have said the second $10 billion would be issued in October or November but no details have been provided so far. Dubai's Department of Finance declined to comment on when the second $10 billion tranche would be launched.

The Department of Finance previously said the $6.5 billion program is not part of the second $10 billion bond.

"Moody's assumes that the second $10 billion tranche will be funded imminently to further prop up the gradually depleting support fund," Moody's said.

Dubai has nearly $19 billion of debt coming due this year and next, according to regional research house EFG-Hermes. Government-owned property developer Nakheel has a $3.53 billion bond due in December and a $1 billion bond issued by the Dubai Civil Aviation Authority in 2004 is due Wednesday.

The $1.93 billion sukuk, or Islamic bond, issued by Dubai's government last week is likely to help pay back such debt, investors have said. The sukuk is part of the $6.5 billion debt program.

"Dubai's recent successful government bond issuance is also likely to be supportive to Dubai's liquidity profile and alleviate some of the pressures that would arise from further bailouts, although the use of proceeds has not been specified," Moody's said.

Write to Maria Abi-Habib at Maria.Habib@dowjones.com