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29 March 2024

Moody's DPW outlook turns positive

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By Staff

Moody's Investors Service has changed the rating outlook for DP World to positive from stable in response to the company's "solid operating performance year to date," its intention to refinance the $3 billion credit facility and Dubai World's recent debt accord with its creditors, according to an emailed media statement.

The change affect DP world's $3.25bn of rated debt, the ratings agency said added.

"The outlook change to positive for DP World reflects Moody's view that the improving fundamentals for port operators - with increasing volumes of global trade flows, especially in emerging markets - are likely to remain favourable over the medium term," explains Martin Kohlhase, Assistant Vice President in Moody's Corporate Finance Group in Dubai.

Moody's affirmed the Ba1 Issuer Rating of DP World and the Ba1 rating for DP World Sukuk Limited and changed the rating outlook to positive from stable. The agency says that the outlook change is in response to: (1) DP World's solid operatingperformance year to date, supporting expectations that debt protection measures will continue strengthening in line with the company's recent public commitments to prioritise deleveraging; (2) DP World's intention to refinance in the course of 2011 the $3bn syndicated revolving credit facility maturing in October 2012; and (3) a debt restructuring agreement for direct parent company Dubai World that was achieved without any impact on DP World's financial or operational profile.

Consolidated throughput, which drives the company's top line growth, has increased in excess of 14 per cent in the first nine months of 2010 compared to the same period last year, in line with industry trends, while DP World has maintained a solid EBITDA margin as adjusted by Moody's above 40 per cent as of June 2010.

Activities in the Emea region continue to drive revenue generation and operating margins with a share of 60 and 65 per cent of the group's total in the first half of 2010. This trend is expected to continue in the medium term with the second half of the year anticipated to reflect increased seasonal trade flows as has historically been the case, Moody's noted.

"The company's solid operating performance trend and its recently articulated commitment to achieve leverage, as measured by a consolidated reported net debt to EBITDA (excluding Moody's standard adjustments), in the range between 3.5x and 4.0x over the next 18 months are key factors driving the change in outlook."

The change in outlook is also driven by DP World's improving trend in operating performance combined with the announced intention to refinance outstandings under its $3bn syndicated revolving credit facility in 2011. With the refinancing, DP World would strengthen its liquidity profile and would possibly extend its debt maturity profile.It is also significant that an agreement reached in September to restructure the debt of Dubai World - DP World's ultimate parent -- did not have any impact on DP World from an operational or financial perspective.

However, Moody's noted that the agency could not completely " eliminate the possibility that ownership by Dubai World could negatively impact DP World in the future. For example, Dubai World has the ability to extract cash through dividends or sell portions of DP World or its assets in order to reduce the parent company's debt."

Nevertheless, it considered  a variety of factors in the update. Moody's said. "The following mitigating factors have been taken into account in the positive outlook:- The restructuring of Dubai World's debt did not affect DP World and the parent has not taken any extraordinary cash distributions from DP World.- DP World, as a port and infrastructure operator, is among the core infrastructure businesses central to Dubai's business strategy in the region and therefore is likely to be a holding that the government of Dubai would seek to retain strategically over the long-term.- Were the government of Dubai to seek to materially reduce its 80 per cent shareholding in the future, bondholders benefit from a change of control clause in case the government of Dubai's ownership were to fall below 50%.

DP World's ratings continue to include very low assumptions for government support that does not currently provide any lift to the rating.

According to Moody's, the factors that could over time lead to a rating upgrade include adherence to achieving more conservatively positioned financials metrics.

Over the next two years, we would expect DP World to demonstrate adherence to financial metrics at the upper end of the ranges we have previously articulated for the rating category and to demonstrate its ability to generate positive free cash flow prior to a potential upgrade. For instance, an upgrade could be considered if retained cash flow to net debt strengthens sustainably in the low teens (%) and FFO interest cover strengthens above 3.0x.

Conversely, DP World's rating would come under negative pressure if operating performance softens significantly and/or financial policies become more aggressive resulting in retained cash flow to net debt trending toward 8% and FFO interest cover toward 2.5x.

The rating could also be downgraded if any financial strategies are contrary to our current assumptions and would result in a weakening in the credit profile.

Moody's previous rating action on DP World was the confirmation of its Ba1 rating with a stable outlook on April 7, 2010.