(The following statement was released by the rating agency)
Jan 10 - Fitch Ratings has affirmed Dubai Holding Commercial Operations Group LLC’s (DHCOG) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at ‘B’, with a Stable Outlook. Fitch also affirmed DHCOG’s Short-Term IDR at ‘B’ and the Recovery Rating at ‘RR4’. The rating actions also affect the senior unsecured rating assigned to DHCOG’s medium-term notes (MTNs).
As per the agency’s expectation, DHCOG’s rentals and hospitality revenues have shown healthy performance in 2011 and 2012 to date and have potential for a strong start in 2013. However further debt reduction in the coming few years is going to depend on cash proceeds from the completion of its non-core asset and investments disposal plan.
Offices and residential prices and demand are currently stabilising in prime locations in Dubai. However, the benefits Dubai is deriving from being the major preferred destination in the Middle East due to the instability affecting other destinations in the region may not be sustainable over the long term.
Resilient Rentals, Hospitality Revenues: Jumeirah’s Revpar and occupancy rates have proved resilient, with both registering an increase in 2012. Nevertheless, Fitch considers that the main challenge to this sector remains the large supply in the project pipeline and the revival of other tourist markets in the region once political stability returns. Thus Fitch’s base case assumptions continue to be conservative. Pricing and occupancy improvement can be seen in DHCOG’s rental divisions, especially in prime areas bringing DHCOG’s gross rental up in 2012 and the same level is expected for the short term including additional units added during the year.
Progress with Asset Disposals: DHCOG continue to progress with its non-core asset and investment disposal programme. Further debt reduction is expected in the coming few years as a result of cash proceeds from the completion of the asset disposal plan. The company’s successful deleveraging plan could help the rating. However, the group’s inability to execute its asset/divestment plan to further deleverage would have a negative impact on the rating.
Managing debt: Fitch forecasts that DHCOG’s Fitch adjusted net debt/EBITDA will average around 3.7x and 4.5x in the next three years. With the repayment of CHF250m MTNs (July 2011) and USD500m (February 2012), DHCOG has no significant maturities before 2014 hence its debt maturity profile leaves some breathing space. Fitch notes that DHCOG will need to raise more debt to finance the fourth phase of the Madinat Jumeirah Project in 2013; however debt is expected to reduce once again over the short term with deleveraging from disinvestments. Significant sustained increase in debt on a DHCOG level could put pressure on the ratings.
Government Support: DHCOG’s standalone rating is ‘B-’ but includes an assumption of on-going operational government support by way of direct cash and land grants. DHCOG’s Long-Term IDR is notched up one notch to ‘B’ from the standalone rating of ‘B-’ to reflect Fitch’s view on prospective support for DHCOG from the Dubai government should the need arise.
Asset disposal plans: non-core asset and investments disposals leading to significant deleveraging and an improved liquidity position could lead to positive rating action.
Drawbacks in executing the group’s asset divestment plans, hampering its ability to deleverage, would have a negative impact on the rating. A worsening of market conditions, putting pressure on cash flow and repayment prospects, could also benegative for the ratings.
A significant sustained increase in debt on a DHCOG level and undertaking significant additional new capex and investments could put pressure on the ratings.
Decreasing or increasing evidence of government support could lead to negative or positive rating actions, respectively.
Based on Fitch’s rating case, DHCOG’s liquidity profile remains tight, mainly due to its negative free cash flow (calculated before asset disposals) and non-avalablity of committed undrawn facilities. However, Fitch believes the group can plug its financing gap from non-core asset disposals and divestment plans in the coming five years, the proceeds of which will help to strengthen its financial structure.