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Credit ratings lead to awkward questions for Abu Dhabi

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The news that credit rating agency Moody’s is downgrading Aldar Properties debt to junk status brought predictable howls of protest from the company whose chief financial officer Shafqat Malik told Zawya Dow Jones that Aldar ‘can rely on Abu Dhabi’.

He said there had been ‘no change in our working relationship with the government over the past two years. It’s been the same or better.’

Moody’s re-ratings

Late last week Moody’s completed a review of seven Abu Dhabi based companies and reconsidered the value of assumptions about government support, and downgraded all seven companies.

The reason for the downgrade is simple enough: assumptions about Dubai Government support for Dubai World proved invalid, so the same doubt is cash on fellow UAE federation emirate Abu Dhabi. However, whether this is an unfair parallel is a moot point.

Moody’s argues that despite having 45 per cent of its stock owned by Abu Dhabi Government funds, Aldar’s property portfolio ‘still contains a significant proportion of commercial projects which will require financing beyond 2011 and for which the support mechanisms are less certain.’

Of course a black mark from Moody’s is something of a self-fulfilling prophesy. The downgrade last week triggered an immediate one per cent increase in the coupon to 9.75 per cent on a $1.25 billion bond due in 2014.

Mr. Malek retorts that: ‘We have got enough liquidity at this stage. We will keep our options open.’

But ratings agencies have been stung by criticisms over their failure to warn about upcoming debt issues in Dubai, and Abu Dhabi is clearly paying the price for this caution. Is it justified?

Commercial viability

Certainly the commercial viability of some mega-projects can be called into question. Pouring billions of dollars into world-class museum buildings, for example, can only be viable as a public sector project with wider goals of increasing tourism and boosting national prestige.

Then again raising bonds to fund these projects with government support should not be an issue provided the government is always the ultimate guarantor of last resort. Surely the credit worthiness of the Abu Dhabi Government is impeachable as the holder of $3 trillion in oil assets and the world’s largest sovereign wealth fund.

But if greater caution by credit agencies leads to a reassessment of projects conceived during the recent oil boom that might be a desirable side-effect. For if Dubai’s experience has taught any lesson it is that allowing too many grandiose projects to go ahead at the same time is a disaster.

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Written by Peter Cooper

March 7, 2010 at 12:01 pm

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