Moody's studies support for Abu Dhabi firms

In fall-out from Dubai World's debt troubles, ratings agency wants a clear show of government backing for borrowers.

In the latest fallout from Dubai's debt troubles, Moody's Investors Service is warning that it may cut credit ratings on several companies controlled by the Abu Dhabi Government if officials fail to convince the agency that they would never be allowed to go the way of Dubai World. The credit ratings agency issued a report last week outlining the criteria it is using to determine whether to continue giving such UAE companies as Mubadala Development and the International Petroleum Investment Company (IPIC) higher ratings on the strength of their government ties.

Saying they were in discussions with government officials, Moody's analysts warned that if they came away with even slightly less confidence in the likelihood of a potential government bailout, "some ratings could drop by several notches". Such "implicit guarantees" were widely assumed before Dubai World said it would ask creditors to renegotiate the terms of up to US$22 billion (Dh80.8bn) in debt.

Dubai World's announcement in late November that it planned to request a standstill on debt repayments triggered a cascade of ratings downgrades of Dubai Government-related borrowers by the three major credit ratings agencies - Moody's, Fitch Ratings and Standard & Poor's (S&P). Analysts at the agencies said they could no longer assume the governments would step in should their companies run into financial trouble.

Moody's last month went even further, placing seven of Abu Dhabi's most prominent companies on review for potential downgrades, including Abu Dhabi National Energy Company (Taqa), Aldar Properties, Dolphin Energy, IPIC, Mubadala and the Tourism Development and Investment Company (TDIC). Moody's also said it was reviewing the rating of Emirates Telecommunications Company (Etisalat), which is controlled by the Federal Government.

"We thought in light of the large downwards revisions in our assumptions of support from Abu Dhabi to Dubai that we should also review our support assumptions for Abu Dhabi GRIs [Government-related issuers]," said Tristan Cooper, a sovereign ratings analyst at Moody's in Dubai. It was a controversial step, one that sources working close to the Abu Dhabi Government said caused considerable concern among the emirate's officials. No Abu Dhabi companies appear to be in financial straits, and with an estimated $425bn in assets at its two largest sovereign wealth funds, Abu Dhabi appears to have more than enough to support them if the need arose.

No other ratings agency has, therefore, extended its reaction to Dubai's debt problems to Abu Dhabi. But even the prospect of lower ratings can raise borrowing costs for an issuer. Abu Dhabi's Government and corporations sold billions of dollar in bonds last year to fund the emirate's ambitious infrastructure plans and to help promote more diverse capital markets. Moody's move could therefore complicate the often testy relationship between Abu Dhabi companies and the ratings agencies.

Last year Taqa terminated its ratings contract with S&P when the agency put its rating up for review, citing its heavy borrowing. And Abu Dhabi Commercial Bank, whose rating Moody's downgraded last month, is part of a class-action legal proceeding against Moody's and S&P, accusing them of inflating ratings on investments related to subprime mortgages. Mr Cooper said that Moody's had long recognised that Dubai had a limited capacity to support the growing debts of its own companies and so any such support, if needed, would have to come from Abu Dhabi or from the Federal Government.

That Abu Dhabi's support came so late - only after Dubai World's standstill request - sent up a red flag at the agency. So did the fact that Abu Dhabi's $10bn in new support funds was said to be contingent on Dubai World winning an agreement from its creditors to delay its debt repayments. What appeared to worry Moody's was the potential for selective, or what some call strategic, defaults. In other words, governments might choose not to bail out some government-controlled companies even if they could afford to.

Moody's said government support might be less likely if a company could be allowed to default without affecting its operations or losing control of them. "Lack of support is a particularly likely outcome if the GRI is likely to continue to be able to execute its core functions even after having defaulted on its debt," the Moody's report said. Governments are also less likely, Moody's said, to support companies that are financially weak. "They will distinguish between GRIs that are viable but need temporary liquidity support and those that lack economic value net of their liabilities," the Moody's report said.

"Dubai World is also an illustrative example that some issuers can default without creditors being able to force a bankruptcy or enforce judgments that would impair the Government's control," it said. "This condition makes default less painful to the sovereign, and therefore support is much less likely."