Dubai makes progress in cutting debt, but challenges remain

The Dubai government and its state-owned entities have come a long way in tackling its maturing debt during the last two years, with the government now facing significantly lower liabilities, rating agency Moody's Investor Services said yesterday. Despite the consistent improvement in governance, transparency and discipline shown by Dubai entities that resulted in the upgrading of credit ratings for some of these entities, Moody's said that some of these entities continue to face refinancing challenges. "The Dubai government's disclosures since 2009 have shown a redefinition of its strategic holdings that Dubai now considers as warranting its support. "We have seen a significant reduction in government liabilities," said David Staples, Managing Director, EMEA Corporate Finance, at Moody's. In total, Moody's has identified $101.5 billion of debt linked to the Dubai government and its state-owned non-financial corporates. According to Moody's assessment, Dubai's contingent liability from state-owned corporates (excluding the debt of state-owned banks) is around $33.7 billion — significantly below Dubai's state-owned corporate debt of $68.6 billion, and excluding $5.1 billion of government-guaranteed corporate debt. Direct debt Based on publicly available government data, Moody's estimates the direct debt of Dubai at around $27.9 billion, of which $18.45 billion was raised from the Abu Dhabi Government and the UAE Central Bank to capitalise the Dubai Financial Support Fund. The rating agency also believes that Dubai's likely direct exposure to contingent liabilities is further reduced to $12.7 billion because some of the state-owned entities that are eligible for support are not likely to need it, namely, DP World Limited and the Dubai Electricity and Water Authority. Despite the reduced government liabilities, Moody's has warned that some entities such as Dubai Holding Commercial Operations Group, Jebel Ali Free Zone and DIFC Investments, which together hold around $3.8 billion of debt maturing in 2012, are expected to face refinancing risks. "We expect these companies could face rating volatility as they move closer to their debt maturities based on the ability and willingness of the government of Dubai to support these entities," said Frank Nowak, Moody's EMEA Corporate Finance analyst. "We are not ruling out any options available to these entities ranging from direct support from the government and refinancing through local banks. But as the maturities approach, these entities face execution risk which is a concern for investors," he said.