Global Arab Network | Moody's downgrades UAE-based Aldar Properties; on review for further downgrade

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Moody's downgrades UAE-based Aldar Properties; on review for further downgrade

Global Arab Network - - George Haddad

Monday, 09 August 2010 14:51

UAE (Abu Dhabi) - Moody's Investors Service has today downgraded the issuer rating for Aldar Properties PJSC ("Aldar") by two notches to Ba3 from Ba1. At the same time, Moody's has converted Aldar's Ba3 issuer rating into a Ba3 corporate family rating (CFR) and assigned a probability of default rating (PDR) of Ba3, in line with the rating agency's practice for corporate issuers with non-investment-grade ratings. Moody's has also implemented a three-notch downgrade to B1 from Ba1 of the ratings for Aldar's USD 1.25 billion bond (due 2014 and issued by Atlantic Finance Limited) as well as for its AED3.75 billion sukuk (due 2013 and issued by Sukuk Funding (No. 2) Limited). All ratings remain on review for further possible downgrade. Moody's expects to conclude its review by mid October 2010.

Today's downgrades are driven by Moody's assessment that Aldar's H1 results and the weak state of the Abu Dhabi property market have further weakened the standalone creditworthiness of Aldar, which Moody's has lowered to 16 from 15 (equivalent to B3 and B2, respectively, on Moody's global rating scale). Although Aldar has stated that it expects to achieve significant project completions and increase opportunities for revenue recognition in H2 2010, Moody's cautions that the company's cash flow generation remains weak. Indeed, Aldar's retained cash flow for the past 12 months ending June 30 reported a loss of AED3.5 billion, whilstfree cash flow also recorded a loss of AED 10.0 billion for the same period, although it has been improving over recent quarters.

Although Aldar had cash and bank balances of nearly AED7.9 billion at the end of June 2010, Moody's notes that the company faces a number of significant debt maturities over the coming 12 months. These maturities come at a time when Aldar has little amounts available under undrawn and existing bank facilities and its ability to refinance is less certain given that free cash flows are expected to remain negative. In particular, Moody's highlights the July 2011 syndicated infrastructure loan, of which AED6.38 billion was outstanding at the end of Q2, as well as the convertible bond of AED4.3 billion.

Moody's has also lowered its shareholder support assumptions for Aldar to moderate from high as actions over recent months have possibly demonstrated a different stance towards the timeliness of support ,which Moody's therefore considers to be less certain. Firstly, the commercial transfer of the Yas Island assets to the government has created uncertainties regarding the timeliness of government support.Secondly, the majority of government funding of around AED 2.8 billion has been classified as a non-current receivable (AED 2.435 billion), thereby raising questions over whether the funds will be provided when Aldar requires them given its potential tight liquidity situation in the future as debt obligations begin to mature.

Overall, Aldar's ratings continue to reflect the links between the company and the government, which has not only been providing Aldar with a significant share of new projects since 2009, but has also been providing ongoing support via loans and other forms of financing. As such, Moody's continues to view Aldar as an important agent of change for the development of the emirate.

Moody's is maintaining the review for possible downgrade of Aldar in order to assess whether Aldar's main shareholders, which are linked to the government of Abu Dhabi and hold an aggregate stake of 37.9% in the company, would still act in concert and provide exceptional and timely financial support which Moody's believes will become necessary to bolster Aldar's liquidity profile over the next 24 months. This could have an impact on all three factors: Aldar's BCA, support level and CFR.

Aldar's unsecured debt instruments are rated one notch below the CFR to reflect the lower support assumption where government support might not be applied equally to secured and unsecured creditors alike as Moody's had previously assumed when support was higher. The one-notch differential between the rated debt instruments and the CFR is based on the significant amount of secured debt that ranks preferentially higher than the unsecured bonds/sukuks.

The principal methodology used in rating Aldar was "The Application of Joint Default Analysis to Government Related Issuers -- an Update", which was published in July 2010 and is available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. This methodology determines ratings on the basis of a company's baseline credit assessment, as well as credit enhancement for exceptional government support.
Accordingly, ratings were assigned by evaluating factors that Moody's considers to be relevant to the baseline credit assessment of the issuers, such as (i) the business risk and competitive position of the companies versus others within its industry; (ii) the capital structure and financial risk of the companies; (iii) the projected performance of the companies over the near to intermediate term; and (iv) management's track record and tolerance of risk. These attributes were compared against other issuers both within and outside of the companies' core industries to ensure that ratings are comparable with those of other issuers of similar credit risk. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Moody's last rating action for Aldar was implemented on 4 March 2010, when the rating agency downgraded the ratings to Ba1 with a negative outlook from Baa2. At the time, this rating action concluded the review for downgrade that had previously been initiated on 9 December 2009.

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