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Rating Action:

Moody's downgrades Dubai Holding to A3 on review; Emaar's Baa1 on review

30 Jun 2009

DIFC, June 30, 2009 -- Moody's Investors Service has downgraded the ratings of Dubai Holding Commercial Operations Group (DHCOG) to A3 from A2 and placed the ratings on review for possible further downgrade. The Baa1 ratings of Emaar Properties PJSC (Emaar) were placed on review for downgrade. The rating actions reflects Moody's views of continued fundamental challenges to both companies' business and financial profiles in the wake of difficult conditions on Dubai's property market, despite a recent announcement to merge both entities.

"Whilst Moody's acknowledges that Dubai's property market seems to have largely bottomed out, the financial and structural implications of its decline have taken its toll on both companies' debt protection metrics", says Philipp Lotter, Dubai (DIFC) based Senior Vice President at Moody's and lead analyst for Dubai Holding. "Moody's believes that these are likely to weaken further before the full effects of market recovery translate into stronger cash flows, irrespective of the announced merger", Lotter adds.

Both companies recently announced a proposed merger which will see Dubai Holdings merge its three property subsidiaries -- Dubai Properties, Tatweer and Sama Dubai -- with Emaar and likely take majority ownership of the new entity.

Moody's highlights that the combination of Dubai Holding's property business with the more mature portfolio of Emaar is likely to be mildly supportive of DHCOG, whilst negatively impacting Emaar, whose fundamental credit profile is considered stronger than that of DHCOG. Whilst both are highly exposed to Dubai's real estate market, Emaar has a longer track record of operation and thus lower large project concentration than DHCOG. It also benefits from a greater share of more predictable property cash flows from its investment portfolio.

DHCOG's ratings have nonetheless been downgraded due to the ongoing market weakness and the prospects of weaker cash flow over the near to medium term, as most new projects are put on hold and the company becomes more reliant on its hospitality and free zones businesses. Moody's also highlights that DHCOG now faces some refinancing challenges over the coming 12 months, which however could be eased with Emaar's stronger liquidity. This ultimately depends on the chosen financial and capital structure of the combined group, which has yet to be determined. Whilst generally positive for DHCOG, Moody's highlights that the addition of Emaar's assets may be insufficient to fully mitigate the effects of a weaker fundamental credit profile.

Upon completion of the proposed merger, Emaar's ultimate government-related stake is likely to rise substantially from its current 32%.

"Whilst the higher government stake in itself may be seen as positive for Emaar's rating, downward pressure remains given Moody's concern by the government's acceptance of diluting Emaar with a weaker business in support of wider market consolidation", says Martin Kohlhase, Dubai (DIFC) based Assistant Vice President at Moody's and lead analyst for Emaar. "Thus higher government ownership in Emaar may not be sufficient to mitigate the detrimental impact the merger would have on its fundamental creditworthiness", Kohlhase adds.

DHCOG's ratings are likely to be confirmed, if the merger leads to a more solid, cash generative real estate business and improved liquidity, whilst maintaining very high support from the Dubai and federal governments and becoming the government's foremost property group for the Emirate. At the same time, ratings could face a further downgrade of one notch, if the combined business faces a more pronounced and deeper crisis of the local real estate market, to which it is now more heavily exposed, and a weaker government support environment. Failure to complete the proposed merger with Emaar could also negatively impact DHCOG's ratings, as DHCOG would then not benefit from Emaar's stronger property portfolio.

Emaar's ratings could be confirmed, if the merger with DHCOG substantially increases the direct and indirect government stake in Emaar, and thus neutralises negative rating pressure that could arise from a weaker fundamental credit profile. This could imply greater government support to the new entity. Conversely, ratings could be lowered by one notch, if the combination with DHCOG's less mature property portfolio is not fully compensated by higher government support.

Moody's understands that the proposed merger will be completed by year-end 2009. Over this time period, Moody's will seek to better understand the political motivation and commercial implications of the transaction on both entities, including the dividend policy as well as chosen capital and financial structure of Emaar, and the degree to which the merger will positively impact DHCOG's liquidity and projected cash flow generation. Moody's also highlights that it does not expect DHCOG's management to change its current policy of managing the commercial arm of Dubai Holding in strict separation from the company's financial & investment arm (under Dubai Holding Investment Group) as a result of the merger with Emaar, which otherwise could put pressure on DHCOG's ratings.

Moody's last rating actions on both DHCOG and Emaar were on 1st April 2009, when the agency downgraded the former from A1 to A2, and the latter from A3 to Baa1 and changed the outlook to negative for both entities.

The principal methodology used in rating these entities was "The Application of Joint Default Analysis to Government Related Issuers", published in April 2005, which 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 we believe are 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 for risk. These attributes were compared against other issuers both within and outside of the companies' core industries and ratings are believed to be comparable to those of other issuers of similar credit risk. Other methodologies and factors that may have been considered in the process of rating the issuers can also be found at www.moodys.com in the Credit Policy & Methodologies directory.

Based in Dubai, United Arab Emirates (UAE), Dubai Holding Commercial Operations Group LLC (DHCOG) is a wholly owned subsidiary of Dubai Holding LLC (DH) and incorporates all the non-financial investment businesses of the group. Dubai Holding consolidates various large-scale infrastructure and investment projects of the Emirate of Dubai, and is 97.5% directly owned by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, who is the Ruler of Dubai, as well as Vice President and Prime Minister of the United Arab Emirates (UAE). In 2008, DHCOG generated revenues of USD 3.7 billion.

Based in Dubai, United Arab Emirates (UAE), Emaar Properties PJSC ranks as the largest master plan real estate developer in Dubai. The company's main shareholder is the government of Dubai, with a 32% stake. In 2008, Emaar generated revenues of USD 4.4 billion.

DIFC
Philipp L. Lotter
Senior Vice President
Corporate Finance Group
Moody's Middle East Ltd.
Telephone: +971-44-01-9536

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Dubai Holding to A3 on review; Emaar's Baa1 on review
No Related Data.
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