Dubai Holding Commercial Operations Group’s A1 ratings remain firmly supported by its close association with the Government of Dubai and its role as one of the emirate’s most strategic corporate enterprises.
The outlook, as forecast by the Credit Analysis Report of Moody’s Investors Service, remains stable.
Fitch, last week, had affirmed a DHCOG’s long-term issuer default and senior unsecured rating at ‘AA-’. Outlook was stable.
“Since the first ratings in January last year, Dubai Holding has implemented many of its near-term strategic priorities and has started generating additional revenue from the hand-over of large real estate projects, including Jumeirah Beach Residence,” says Philipp Lotter, lead analyst for Dubai Holding and senior credit officer at Moody’s Middle East Limited, based in Dubai International Financial Centre.
“Whilst its balance sheet is strong and carries fairly limited leverage today, ratings are constrained by our expectations of diversification, which may require larger external funding over time,” says Lotter.
The company’s ratings are supported by the group’s intrinsic financial strength and the credit enhancement that can be derived from the financial strength of Dubai.
The completion and hand-over of some large-scale infrastructure projects last year and only moderate increases in leverage are likely to further support debt protection ratios, in line with Moody’s assumptions.
Ratings also benefit from the group’s buoyant free zone operations and hospitality business under the strong Jumeirah brand.
However, ratings are constrained by ambitious real estate projects and high exposure to a single geographic market. Dubai Holding’s project portfolio includes some very ambitious and large-scale undertakings, including Dubailand and Al Bawadi, a massive tourism complex that will include the largest hotel in the world.
Such developments remain dependent on the sustained growth and stability of the region in general, and Dubai as a desirable tourist destination in particular, and therefore carry both execution as well as commercial risk.
Ratings are also constrained by the group’s high concentration on one economic region, thus showing high dependence on the sustained growth of Dubai’s property market, and – given its exposure to tourism projects – its tourist growth.
As the group gradually adds international projects to its portfolio, diversification may reduce this risk over time.
Dubai Holding aims to create a strong foothold across a diverse range of industries to create a diversified, knowledge-based economy, and export this knowledge for the benefit of the region.
The group’s credit drivers are essentially real estate, with some additional contribution from hospitality, which until recently was the main contributor to the group’s bottom line.
The real estate activities are mainly carried out through Dubai Properties, Tatweer and Sama Dubai, while the earnings of Jumeirah and Tecom are more dominated by lodging and recurring rental income, respectively.
Through its Tecom subsidiary, Dubai Holding owns and operates some of Dubai’s most prominent and high-profile free zones, including Dubai Media City, Dubai Internet City and Dubai Knowledge Village.
The free zones have been established and developed to attract knowledge-based industries to the emirate and, in addition to certain tax incentives, provide companies with a “one-stop shop” of services, including full telecommunications and other business-related infrastructure.
The companies within Dubai Holding are fairly young operations, with only three years of track record of reported financial performance.
While the group has International Financial Reporting Standards-compliant numbers, which are audited, these relate to Dubai Holding Commercial Operations Group (DHCOG), while those of Dubai Holding, also fully compliant with IFRS, are not public.
The main sources of revenue at the end of 2006 were essentially hospitality [Jumeirah], land sales and rental revenues [primarily from the existing free zones].
Full audited accounts for 2007 are not available yet but the revenues are expected to have represented more than 80 per cent of total earnings.
Dubai Holding’s hospitality brand Jumeirah is one of the most valuable in the region, which is gradually diversifying internationally through managed properties.
In 2007 Jumeirah Group went through a major restructuring exercise that led to the separation of the ownership of the group’s hotels and assets from the management, with the creation of two new entities – Jumeirah Assets LLC and Jumeirah Management LLC.
Consequently, Jumeirah Management entered into 10 new management contracts in the Middle East, Europe, the Caribbean and Asia.
The assets under Jumeirah Assets comprise five prestigious properties in Dubai, including the iconic Burj Al Arab hotel, as well as additional four properties abroad, including new openings in London and New York.
Going forward, Moody’s expects the group’s portfolio of managed properties to grow considerably, both in Dubai, which remains desperately short of five-star hotel rooms, and abroad, including planned openings in London (Beetham Tower), Pukhet Private Island Resort (Thailand) and Shanghai, China.
As evidenced in its recent acquisition of a minority stake in Orient Express, the company may be willing to undertake international acquisitions to grow its hospitality business globally. Such transactions will be evaluated on a case-by-case basis. Rising financial leverage may be partially offset by diversification benefits, that are further supported by Jumeirah’s strong brand franchise.
The report says it expects the group to be able to fund a large part of its domestic real estate properties from land sales and advance payments, although international developments through Sama Dubai may require some moderate debt financing over time.
Debt is mainly raised centrally at DHCOG, and any capital market debt will also be raised at DHCOG. Nonetheless, some debt is placed with Tecom and Jumeirah, which is expected to remain there to maintain current pricing and tenor.
Dubai Holding’s liquidity profile over the next 12 months is strong and it is estimated that the company will generate sufficient cash flow and have access to alternate sources of liquidity in order to be able to cover maturing debt commitments.
The company has recently established a $1 billion (Dh3.67bn) revolving credit facility with a three-year tenor, which remains untapped and provides ample liquidity back-up.
Given the high government support levels that are responsible for the assessment of Dubai Holding Commercial Operations Group and the nature of its relationship with its owner and the state, its ratings are likely to be highly correlated with the sovereign.
At current levels, the firm’s rating sensitivity remains strongly biased towards changes in sovereign-related factors.
Ratings therefore assume that the group’s ownership structure and the support derived from its owner will remain unchanged.
A diversified group
The Dubai Holding Commercial Operations Group LLC, is a wholly owned subsidiary of Dubai Holding LLC and incorporates all the non-financial investment businesses of the group.
Dubai Holding is a diversified group of companies, with five subsidiaries under the Dubai Holding Commercial Operations Group, which essentially incorporates real estate and hospitality businesses, and two under Dubai Holding Investments Group, which holds its international investment and private equity business.
The group was created in October 2004 to consolidate various infrastructure and investment projects in Dubai.
Moody’s A1 rating for Dubai Holding unit reaffirmed