Moody’s upgrades Emaar

Cites 'materially improved liquidity profile' and reduced exposure

Moody’s Investors Service has upgraded Dubai-based property developer Emaar Properties’ corporate family rating to Ba3 from B1, the ratings agency announced in a statement today. The ratings upgrade comes in the wake of improved financial conditions at the region’s largest real estate developer.

Shares of the property giant, listed at the Dubai Financial Market, last traded at Dh2.47 per share today, down 1.2 per cent form yesterday and near their 52-week low of Dh2.35 in a market that has been on a negative trend on weak global sentiment.

“The upgrade of Emaar's CFR reflects the receding default risk, Moody’s said, adding that “the B1 rating of Emaar Sukuk has been affirmed. The outlook for all ratings is stable,” it said.

The ratings agency cited Emaar’s “materially improved liquidity profile” as one of the reasons behind the upgrade. Moreover, in view of Emaar’s reduced exposure to the Dubai market (with no major ongoing project), Moody’s said it expects the company to become more internationally focused.

“Given that this makes exceptional support from the government less likely in the near term, Moody’s is declassifying Emaar as a government-related issuer and is now assessing the company’s rating on a standalone basis,” the agency said.

Moody’s explained that the “Ba3 corporate family rating reflects (i) the company’s leading position in the regional real estate market; (ii) some offsetting benefits from the growing diversification of its cash flow base, both internationally and towards recurring revenues; (iii) the expectation of reduced exposure to the Dubai real estate market over the medium term; as well as (iv) an improved financial risk profile that has benefited from the refinancing steps taken by the company’s management over the past 12 months.”

Emaar recently accessed debt capital markets and has established plans to arrange longer term debt, both of which are earmarked for debt refinancing, thereby extending the property giant’s overall debt maturity profile and providing some cushion against the sizeable execution risk on the development front, according to Moody’s.

Moody’s added that it would consider upgrading the outlook or ratings “if Emaar establishes a track record of outperforming the rating agency’s guidance for the stable outlook, as well as a solid track record in the collection of cash for presold units, with a gradual return to sustained positive free cash flow generation.” This, the agency stated, would be further supported by the sale of properties currently held on Emaar’s books.

On the other hand, the agency said that its “ratings could be downgraded if Emaar does not meet its property pre-sales and sales targets, thereby materially undermining the company’s gross margin, operating cash flow and balance sheet liquidity.”

Moody’s said it would consider a deterioration in fixed-charge coverage or leverage metrics as signals for a possible downgrade, specifically an increase in the ratio of debt to capitalisation to more than 40 per cent, and a fall in FFO/debt to below 20 per cent and in interest coverage to below 2.0x. “Any liquidity concerns or deteriorating trend in covenants’ headroom would also put negative pressure on the rating,” it said.

Nevertheless, Moody’s said it expects Emaar “will be able to comply with revised financial covenants established in conjunction with the recent refinancing activity” and maintained that the earlier concerns about Emaar’s previously constrained headroom had been eliminated.

The other factors that Moody’s said were responsible for the upgrade were “the group’s improved operating and financial performance on the back of increasing contributions from its recurring-revenue segments in 2010 and H1 2011” and “Emaar’s assumed ability to maintain financial metrics in line with the Ba rating category in the medium term.”

Moody’s added that “Emaar Sukuk rating has been affirmed at B1 based on Moody’s expectation that Emaar’s capital structure could over time include a higher proportion of secured debt given the high quality and cash-generating capacity of completed assets, with bank lenders possibly being in a preferential position compared with bond and sukuk holders.”

In Moody's view, it will be critical for Emaar's Ba3 ratings that the company's international operations and associates remain self-financing so as to maintain net leverage on a declining trend, in line with the rating agency's guidance for the company's ratings in the coming quarters.

Notwithstanding the positives outlined above, Moody’s pointed to uncertainties given that Emaar is undertaking a strategic review that will impact the execution risk and capital requirements of its international operations.

“The current Ba3 positioning also reflects Moody’s expectation that Emaar will not return to reporting positive free cash flow generation before the end of 2012,” it said, and added that  the ratings agency “assumes that the ongoing strategic review will not fundamentally change Emaar’s business model, especially the pre-selling model and the company’s intention to deepen the asset base that generates recurring revenues.”

Nevertheless, Moody’s added that Emaar’s ratings remained “constrained at the current level by the above factors as well as by the generally high level of execution risk attached to international developments, as demonstrated by a delay in deliveries that have affected revenue recognition in the first six months of 2011.”

Going forward, Moody's assumes that Emaar will follow a de-leveraging strategy, with cash and liquid resources being sustained at a high level and solid headroom being maintained under its financial covenants.


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