International rating agency Standard & Poor's yesterday said it has revised the CreditWatch implications for 'BBB+' long-term credit ratings on property developer Emaar to 'developing' from 'negative' following the announcement of merger talks with Dubai Holding's property subsidiaries.
The rating action reflects the prospective benefits on Emaar's credit profile from a merger with the real estate businesses of Dubai Holding Commercial Operations Group (DHCOG), said a statement. "The developing implications also reflect the downward pressure on the ratings from the weak Dubai real estate market if the merger is not completed," said Alf Stenqvist, Credit Analyst at S&P.
The current ratings on Emaar reflect the group's important role and strong position in the Dubai property development market as one of three government-related master developers, and its strong relationship with, and minority ownership by, the Government of Dubai (not rated). The ratings also reflect the group's low debt leverage and strong asset base. The main constraining rating factors include the inherent risks in the cyclical property development industry and the group's large exposure to the weakening of the real estate market.
Emaar said on Saturday that the proposed merger will take about four months to complete.
S&P said the combination of Emaar's and DHCOG's real estate businesses would likely increase the former's importance in the development of Dubai, as well as increase the company's indirect government ownership. A merger would create possibilities for synergies and strengthen Emaar's position in the Dubai real estate market, which is currently experiencing a downturn. This in turn is pressuring Emaar's standalone credit quality.
Further merger benefits on Emaar's credit quality will depend on the capital structure of the new entity.
S&P said: "We will also review the impact of the prospective merger on Emaar's standalone credit quality, the future business and financial strategies and capital structure of the merged entity. The ratings could be lowered if the merger is not completed, as the weakening Dubai real estate markets are pressuring Emaar's business risk profile and financial position."
However, S&P maintained DHCOG's 'A' long-term ratings on CreditWatch with negative implications.
S&P said the merger would create possibilities for synergies and strengthen DHCOG's position in the Dubai real estate market.
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