• Home
• Real Estate
• News Article

Jan 25 2012

more articles from

Fitch Revises Dubai Holding Commercial Operations Group's Outlook to Stable; Affirms at 'B'

The Outlook revision reflects the company's good progress with its non-core asset disposal programme and better than expected operating performance in the hospitality and rentals divisions and reduced leverage. Additionally, with the repayment of CHF250m MTNs (ca. USD240m; July 2011) and USD500m (February 2012 as announced today), DHCOG has no significant maturities before 2014 as DHCOG 's debt maturity profile leave some breathing space.

" DHCOG 's current ratings are dependent on execution of targeted non-core asset disposals rather than FCF generation. The disposal of non-core assets, mainly for Dubai Property Group, and the unwinding of its investments will give DHCOG the necessary financial flexibility to cope with the difficult real estate market in Dubai," says Bashar Al Natoor, Director in Fitch's EMEA Corporates team in Dubai. "Fitch also notes that disposals have been combined with a rebalancing of the portfolio towards build to rent vs. build to sell, which will create sustainable value by generating stable cash flows from its divisions, by increasing the rental income capacity at the level of the group in addition to the existing hospitality cash generative division," Al Natoor added.

The affirmation also reflects DHCOGs' ability to manage its net debt position and Fitch's expectation that it should continue to reduce leverage over coming months. In FYE11 disposals have already made a positive contribution to its cash flow and DHOCG is progressing well in Q1 for its 2012 target.

Fitch notes that rentals and hospitality revenues are holding up relatively well and performing better than expected to date compared with Fitch's base case assumptions. This is partly due to the regional turmoil affecting some of the main regional destinations, which had a positive impact on Dubai's hotel, retail and residential sectors, resulting in better credit metrics and liquidity position albeit still considered weak. This is coupled with the generally healthier economic sentiment towards Dubai.

The rating also continues to reflect Fitch's expectation that market prospects will remain under pressure. Fitch recognises that there is divergence between the performances of the three divisions, as DHCOG continue to benefits from Jumeirah Group hospitality income and contracted rental income from TECOM Investments LLC and to a lesser extent Dubai Property Group (DPG). Nevertheless market prospects for the Dubai property market continue to be challenging especially for DPG property sales.

Jumeirah Revpar has proved resilient, increasing by almost 3.8% in 2011. This was coupled with improved occupancy rates, which had increased by 2.8% in 2011. Nevertheless, Fitch considers that the main challenge to this sector remains the large supply in the project pipeline and the revival of other tourist markets in the region once political stability returns. Thus Fitch's base case assumptions continue to be conservative. On the rental side, although occupancy and price were under pressure in 2010 and 2011, DHCOG 's gross rental was AED1.7bn and the same level is expected for 2011 including additional units added during the year.

DHCOG 's standalone rating is 'B-' but includes an assumption of ongoing operational government support by way of direct cash and land grants. DHCOG 's Long-term IDR is notched up one notch to 'B' from the standalone rating of 'B-' to reflect Fitch's view on prospective support for DHCOG from the Dubai Government in case of ultimate need.

DHCOG 's standalone rating reflects Fitch's concerns about its weak, albeit improving, liquidity . Fitch forecasts that DHCOG 's Fitch adjusted net debt/EBITDA will average around 6x to 7.5x in the next three years. The agency expects DHCOG 's Fitch Adjusted EBITDAR net interest cover will increase to above 4x in 2011, and to a range of 3.0x-2.5x in the next three years. DHCOG is exposed to cyclical industries, principally Dubai's real estate and hospitality markets, which could potentially experience increased vacancy rates and a higher risk of buyer and tenant defaults, although the latter would be closely linked to macroeconomic conditions in Dubai. Weakness in these markets is expected to continue through 2012 and 2013 at least.

Based on Fitch's rating case, the company's liquidity profile remains weak, mainly due to the negative free cash flow, which is calculated before the asset disposal and its limited long-term committed undrawn facilities. However, Fitch expects that DHCOG should be able to plug its financing gap from non-core asset disposals (mainly from DPG assets) and disinvestment plan in the coming five years, the proceeds of which will be applied to strengthen its financial structure.

While details of the assets to be sold have not been disclosed, DHCOG owns a sufficiently wide array of assets and investments to make the disposal target achievable. Further debt reduction is expected in the coming years, as a result of cash proceeds from the completion of the asset disposal plan. The company's successful deleveraging plan could help support the rating. However, the group's inability to execute its asset/divestment plan to further deleverage would have a negative impact on the rating.

Contact:
Primary Analyst
Bashar Al Natoor
Director
+971 4 4081809

Fitch Ratings Limited
DIFC, Gate Village
PO Box 506527
Dubai

Secondary Analyst
Anil Jhangiani
Director
+44 (0) 20 3530 1571

Committee Chairperson
Frederic Gits
Managing Director
+33 1 44 29 91 84

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Corporate Rating Methodology', dated 12 August 2011, are available at www.fitchratings.com.

Applicable Criteria and Related Research: Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:

HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

© Press Release 2012