Dubai: Uncertainty surrounding the proposed consolidation between real estate giant Emaar and three property developers under the government-owned Dubai Holding umbrella has thrown up questions about the plans financial implications for the two companies.
Moody's on Tuesday reacted by downgrading its credit rating on Dubai Holding one level from A2 to A3 and placed it on review for further downgrade. Emaar Properties has been put on review for possible downgrade, from its current Baa1.
"Whilst Moody's acknowledges that Dubai's property market seems to have largely bottomed out, the financial and structural implications of its decline have taken its toll on both companies' debt protection metrics", said Philipp Lotter, senior vice president at Moody's and lead analyst for Dubai Holding.
"Moody's believes that these are likely to weaken further before the full effects of market recovery translate into stronger cash flows, irrespective of the announced merger", Lotter adds.
Although some details of the proposed merger have emerged, including a statement from Emaar on the likely impact on minority shareholders and on the debt situation of the company, the issue has thrown up more questions than answers.
Analysts divided over Emaar
One of these concerns the government-related stake in Emaar. Analysts are divided on whether this will have a positive or negative impact on Emaar, the only listed company of the four. Moody's has expressed concern that the Dubai government has accepted "diluting Emaar with a weaker business in support of wider market consolidation''.
"Thus higher government ownership in Emaar may not be sufficient to mitigate the detrimental impact the merger would have on its fundamental creditworthiness" says Martin Kohlhase, lead analyst for Emaar.
While Fitch Ratings announced it would monitor Dubai Holding and Emaar ratings for action as further details emerge, Standard and Poors has adjusted its CreditWatch rating on Emaar to "developing'' from the previous "negative''.
"The rating action reflects the prospective benefits on Emaar's credit profile from a merger with the real estate businesses of Dubai Holding Commercial Operations Group. The developing implications also reflect the downward pressure on the ratings from the weak Dubai real estate markets if the merger is not completed,'' an S&P statement said.
