Lack of Abu Dhabi debt guarantees comes at a price

Abu Dhabi-linked firms will pay more to raise capital in the wake of Moody’s downgrades as a government statement of support for the high-profile firms fell short of explicit guarantees, analysts said. Abu Dhabi, the wealthiest emirate in the seven-member United Arab Emirates federation, has dismissed Moody’s downgrade of seven Abu Dhabi-government linked companies, saying it had the “fiscal position and reserves” to meet its commitments to the firms, especially three which are wholly state-owned. But the emirate stopped short of offering an explicit, contractual guarantee the ratings agency was pushing for, which analysts said was crucial in the wake of Dubai’s debt crisis last November. “November 25 changed everything,”  Khuram Maqsood, managing director at Emirates Capital, said referring to Dubai’s announcement to delay repayment of $26 billion in debt. “It changed the implicit assumptions that both lenders and credit agencies were making with respect to borrowings by state-related entities. It changed everything because the implicit assumption was violated.” Dubai distanced itself from debt woes at its state-owned conglomerate Dubai World last year, shattering widely held expectations among investors that the emirate would back the debt of its state-related entities or GREs. Instead, Abu Dhabi gave Dubai a $10 billion lifeline and Dubai World is in restructuring talks. “It seems that the Dubai experience has led the agencies to be more cautious in assessing the sovereign guarantees that Abu Dhabi has made verbally with respect to the debt of GREs,” said David Butter, director for the Middle East and North Africa at the Economist Intelligence Unit, in London. “Unless these guarantees are formally written into the prospectus of debt issues, the agencies clearly feel they have to reflect this ambiguity in their ratings,” Butter added. In downgrading the seven firms, Moody’s said that, despite Abu Dhabi’s full and unconditional backing, there was no explicit formal agreement requiring the emirate to support the companies “under all circumstances.” The agency cut its ratings on investment vehicle Mubadala, International Petroleum Investment Company (IPIC) and Tourism Development & Investment Company (TIDC) – all 100-percent owned by the Abu Dhabi government. Moody’s also downgraded Emirates Telecommunications (Etisalat), Aldar Properties, Abu Dhabi National Energy Co (Taqa) and Dolphin Energy. “Moody’s move confirms the market’s growing belief that the sovereign can choose not to act to help semi-sovereign names if there are no explicit state guarantees,” said Okan Akin, RBS emerging markets analyst in London. Abu Dhabi said it was impossible to differentiate between the government and the three wholly owned firms. “The three companies TDIC, Mubadala, and IPIC … each play a crucial role in the government’s strategy for diversifying the economy. They are irreplaceable,” said Abu Dhabi’s Finance Ministry. Mubadala, which has a stake in Ferrari, said the ratings change had no “financial, strategic or operational impact” on its business model while TIDC called the cut “unjustified.” Abu Dhabi state-owned entities have sold billions of dollars in bonds in the last two years to fund the oil-rich emirate’s ambitious expansion plans and their own funding needs. In 2009, Abu Dhabi and its entities issued at least $10 billion worth of bonds and a senior banker said another $5 billion-$10 billion would be needed this year to fund plans. “All these companies have specific financial needs whether it is IPIC, Mubadala, TIDC or Aldar,” the Abu Dhabi-based banker said. “But it is not going to be easy going forward, borrowing will be costly.” IPIC has negotiated a $2.5 billion loan with banks to refinance existing debt. Mubadala is looking to borrow between $2 billion to $3 billion for its corporate funding needs. “Abu Dhabi is a good name and not a stressed credit by any means,” said Aviva emerging-debt-fund manager Jeremy Brewin. “Its oil revenues are perfectly sufficient for its funding needs at the sovereign level,” he added. “The question is what is it responsible for indirectly and what can it allow to slip off if some unexpected risk were to occur?”

 

< Prev		Next >