Abu Dhabi Launches $10Bn Global Note Program

Abu Dhabi Launches $10Bn Global Note Program

Abu Dhabi launched a global medium-term note program last week to attract international investment. The program is partly intended to provide funds for domestic projects operated by government-owned companies in Abu Dhabi, because of the higher cost and difficulty in raising funds from the private sector, thus sustaining the heavy investment program undertaken in the emirate, said Tristan Cooper, Dubai-based Senior Analyst – Vice President in Moody’s Sovereign Risk Group. Abu Dhabi is using a phased approach, and the initial note offering last week was two tranches of $1.5bn, one maturing in 2014, priced at 400 bps over treasuries and the other in 2019, priced at 420 bps over treasuries. Moody’s estimates that the total envisaged size of the program is $10bn. MEES understands that the international banks managing the sale are Citibank, Deutsche Bank and JP Morgan Chase & Co, along with the National Bank of Abu Dhabi and the Abu Dhabi Commercial Bank.

Mr Cooper says there does not seem to be a direct link between the Abu Dhabi note program and the federal support package for Dubai announced in February, under which the Central Bank of the UAE has purchased $10bn worth of bonds issued by the government of Dubai (MEES, 2 March). The Abu Dhabi government continues to run a fiscal surplus and has a large stock of offshore assets, so there is little need to raise debt to finance such support, adds Mr Cooper. Another important motivation for Abu Dhabi’s bond program is the development of a yield curve and a transparent pricing benchmark for potential private sector debt issuance in the emirate.

Moody’s Investor’s Service has assigned a foreign currency rating of Aa2 with a stable outlook to the bond program, while Standard & Poor’s Ratings Services (S&P) assigned its AA long-term senior unsecured debt rating and Fitch Ratings assigned a ranking of AA, the third-highest investment-grade category.

Moody’s Concludes Review On Six Dubai Companies

Moody’s concluded its review of the ratings of six government-related issuers in Dubai on 1 April with confirmation for four companies, and downgrades on two. The outlook on all the ratings is negative. Companies whose ratings were confirmed are DP World (rated A1), Dubai Electricity & Water Authority (DEWA, rated A1), Jebel Ali Free Zone (JAFZ, rated A1) and DIFC Investments (DIFCI, rated A1). Companies whose ratings were downgraded are Dubai Holding Commercial Operations Group (downgraded to A2 from A1) and Emaar Properties (to Baa1 from A3). Moody’s stated that it will continue to monitor both fundamental credit profiles and the relative positioning of financial support beneficiaries within ‘Dubai Inc’ in order to ascertain that existing ratings remain appropriately positioned.

The support offered by the federal government contributed to a less severe credit action on the companies, although it was envisaged by Moody’s at the beginning of its review. However, the emirate is still considered vulnerable in the current global economic environment, given its reliance on volatile sectors such as real estate, trade, financial services and tourism, as well as its burgeoning debt and refinancing challenges. “We stress that our Dubai Inc ratings potentially have a high transition risk given their reliance on an assumption of generous and timely federal support. Without that support, the ratings would be much lower,” says Mr Cooper. “Our negative but nuanced rating actions strike a balance between the materialization of substantial support from the federal government and the deterioration in Dubai’s intrinsic credit strength. We recognize that not all Dubai Inc companies are the same. Clearly, some are more exposed to Dubai’s macro-economic difficulties than others. We have reflected these distinctions in the subtlety of our rating approach.”

On 17 March S&P had lowered its ratings on six Dubai-based government-related entitiesby one grade. The A+ ratings on DIFCI, DP World Ltd., JAFZ, and JAFZ Sukuk Ltd. were lowered to A, and the A-1 short-term ratings were affirmed. The A/A-1 ratings on Dubai Multi Commodities Centre Authority were lowered to A-/A-2, while the A+ long-term rating on Dubai Holding Commercial Operations Group (DHCOG) was also lowered to A. The outlook on all entities remained negative, indicating the likelihood of downgrades if their flexibility is further impaired by the difficult economic environment.

Challenging Environment Spurs Credit Actions On Banks, Companies In Dubai

The deterioration in Dubai’s economic fundamentals since the last quarter of 2008 because of the global economic downturn is increasingly putting under pressure Dubai authorities in the near term, and it is reflected in repeated actions by international rating agencies.

Moody’s placed under review for possible downgrade the C+ bank financial strength rating of HSBC Bank Middle East Limited (HBME) on 17 March. HBME is a wholly owned subsidiary of HSBC Holdings, registered in the Channel Islands, with operations in the Middle East. The Aa2 long-term local currency rating and the foreign currency deposit and debt ratings were also placed under review for possible downgrade. The rating action was based on expected asset quality and profitability pressures in the countries that HBME operates. Moody’s focused on the challenging operating environment in the UAE, which constitutes around 70% of the bank’s operations. This is regarded as more volatile, with a growing possibility of rising delinquencies in the next 12-18 months, explained Moody’s, which expects to complete the review this month.

Growing concern regarding the impact of the economic downturn on the banking sector in Dubai was also reflected by S&P’s mid-March decision to place on credit watch its long-term counterparty credit ratings on four Dubai-based banks, namely Emirates Bank International, National Bank of Dubai (NBD), Mashreqbank, and Dubai Islamic Bank (DIB), with negative implications.

Copyright MEES 2009.