Top Dubai landlord in new ratings row

The Dubai Multi Commodities Centre hit back yesterday after Standard & Poor's said it expected the company to have cash management problems this year.

The Dubai Multi Commodities Centre (DMCC) hit back yesterday after Standard & Poor's (S&P) said it expected the company to have cash management problems this year. The DMCC, which owns the Dubai Gold and Commodities Exchange and developed the 87-building Jumeirah Lakes Towers project on Sheikh Zayed Road, yesterday objected to the assessment by the global credit ratings agency.

It said all of its debt was retired when it finished repaying a US$200 million (Dh734.5m) Islamic bond in May. S&P was conducting a final review of the company before ending its ratings coverage, as previously requested by DMCC.In its review, S&P said it was concerned the company was eating through cash at a rapid rate and reiterated a "negative" outlook that it has maintained since last November.

"We continue to have concerns about the company's net cash consumption over coming months and its sizable trade payables," S&P said. Although the DMCC had paid off its debts, S&P said it was "uncertain about the future earnings capacity of its core business. We expect DMCC to generate negative free cash flow in 2010". Malcolm Wall Morris, the chief executive of the DMCC, yesterday called that assessment unjustified, pointing to the company's recent growth. He said business registrations in the economic free zone had risen by 40 per cent this year and there was sufficient cash on hand to complete infrastructure work at Jumeirah Lakes Towers.

The DMCC did not turn over its financial information to S&P for a final review, he said, because the rating was being withdrawn. "We think this exit rating is totally unjustified as S&P's assessment is based on historic data," Mr Morris said. "In May, DMCC paid off all sukuk holders in full and now has no debt at all. Consequently we asked to terminate the rating and did not see the need to share our latest financials and long-term plans with S&P."

The DMCC last had its ratings lowered in April to "B", a sub-investment, or "junk" grade. That followed a downgrade last November in the aftermath of Dubai World's announcement that it would restructure $23.5 billion of debt. The DMCC was owned by Dubai World, according to press releases around the time of the conglomerate's founding in 2006, but the company now says it is owned directly by the Dubai Government.

Credit ratings are important for companies because they help investors gauge the risk of default on financial obligations. Banks and investors generally demand higher interest rates in return for lending to companies that have lower credit ratings. S&P and the other two ratings giants - Fitch Ratings and Moody's Investors Service - have downgraded numerous companies in Dubai in the past year, citing deteriorating property prices, stress in the banking sector and renewed fears of default after Dubai World announced its debt restructuring. Among those downgraded in recent months were Emaar Properties, the country's largest developer, Emirates NBD, the country's largest bank, and DP World, the global ports operator that Dubai World might sell as part of a contingency to meet payments to creditors under its restructuring proposal.

The downgrades have occasionally led to sharp disputes between companies and the ratings agencies and, more rarely, ratings withdrawals. S&P in January ended its rating of Dubai Holding Commercial Operations Group, a division of one of the emirate's largest government conglomerates, citing a lack of financial information from the company. Also in January, Emirates NBD ended its relationship with S&P, saying that with the completion of the merger that formed the bank, ratings were no longer needed.

Jan Plantagie, S&P's Middle East head, said recent withdrawals were not interrelated. Given the troubled economic circumstances of the past year and a half, he said, the occurrence of downgrades and withdrawals is not a surprise. "The stressed credit environment in some Gulf countries coupled with the global economic stress has put pressure on ratings in the region and caused some defaults and rating withdrawals," he said. "Globally, companies do withdraw ratings for many reasons and this is always regrettable but a normal part of our business. We started rating entities 20 years ago in the region and up to 2007 it has generally been a positive credit environment and ratings continued to grow. Now that we had a negative credit cycle for a few years, one would have expected that some ratings would be withdrawn as credit quality for some is lowered."

Companies across the Middle East were also loath to accept below-investment-grade credit ratings, he said, although a large portion of the companies that S&P rates globally fall into that category. "In general, the acceptance of non-[investment grade] company ratings in the Middle East remains very low as entities still perceive having a non-[investment grade] rating is a bad thing," he said. "If you realise, however, that the majority of our US ratings and a very large part of our European ratings are non-[investment grade], this Middle East perception of non-[investment grade] ratings shows that the capital markets in the Middle East are still at their early stages."