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Dubai Holding unit to repay $500m

By Issac John DUBAI - Dubai Holding Commercial Operations Group , or DHCOG , the real-estate and hospitality unit of Dubai Holding , said on Tuesday that it would repay a $500 million bond maturing in February 2012 from its own internal cash flow.

" DHCOG will repay the $500 million bond when it matures in February 2012 from its own internal cash flow," the DHCOG said in an e-mailed statement.

DHCOG 's promise of repayment came amid concern voiced by credit rating firm Moody's Investors Service about Dubai government-related companies and their ability to repay debts next year.

DHCOG said its operating liquidity and capital adequacy remain good and that it has a "healthy revenue stream from its diverse portfolio of income generating assets, held by its hospitality, business parks and real-estate companies."

The group added that is has no plans "to refinance or restructure its outstanding loan commitments and remains committed to meeting all its financial obligations as and when they fall due. The Moody's reports said a division of Dubai Holding , along with state companies Jebel Ali Free Zone and DIFC Investments "face refinancing risks" as they tackle a combined $3.8 billion of debts due next year. Financial analysts said Dubai has the resources at its disposal to repay all debts due in 2012. They dismissed Moody's views as quite far-fetched.

Dubai has been showing strong signs of growth for some of the key drivers of its economy including hospitality, tourism, and trade. The Moody's report was followed by bleak overview of the UAE's banking sector by Fitch Ratings on Tuesday. Fitch Ratings believes that the weak global economy and slowdown in Abu Dhabi will represent new headwinds for the UAE banking system. While the fragile real estate sector and several UAE corporates continue to pose significant asset quality challenges for the sector, banks will face new headwinds, it said.

"The UAE operating environment is not immune from global issues and this threatens the recovery in the banking system. Fitch is particularly expecting several key economic sectors, such as trade, tourism and services to be negatively impacted."

Fitch noted that Abu Dhabi has been cutting its spending on construction-related projects, owing to concerns about the significant oversupply in the real estate market, an increase in the Emirate's financial commitments, and the slowdown in the global economy.

"Key projects remain in the pipeline, but some contracts have been delayed or possibly cancelled, as the Abu Dhabi government has prioritised major infrastructure projects. Fitch views this as positive and to benefit the economy in the long-run. However, this sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for the banks' asset quality in the short-term."

It said the significant increase in the renegotiated private sector loans hides the true extent of the banks' asset quality problems. "Whilst fundamental credit issues in the operating environment remain unresolved, some of these loans may re-emerge as non-performing loans. Ultimately, the success of the various restructuring and renegotiating plans accepted by the banks depends on recovery in both the UAE and globally."

"Overall, UAE banks remain profitable to date, despite weaker asset quality and slow loan growth. Core earnings benefit from lower funding costs. However, Fitch anticipates core earnings will decline given low business volumes and the recent Central Bank of the UAE rules on retail banking. Nevertheless, Fitch recognises the ability of pre-impairment income to continue to absorb high credit costs."it said.

It said customer deposits decreased significantly in the past three months with the outflow of unstable deposits and some large government related deposits. "As a result, the system loans/deposits ratio climbed back to the 100 per cent mark in September 2011. However, liquidity pressures remain manageable at a time when loan growth is slow," Fitch said in its report "Major UAE Banks: Key Issues and Trends." The key challenge for liquidity is the banks' ability to raise long-term funding. It is clearly more costly, especially for Dubai based banks, when global markets are less liquid. Combined with a relatively tight loans/deposits ratio, Fitch expects continuing funding constraints.

© Khaleej Times 2011