Rating agency Standard & Poor's on Thursday downgraded six Dubai-government-backed companies to junk status, the latest cut by an international ratings agency as the emirate showed little inclination to support its heavily indebted companies like Dubai World.
Dubai World — the emirate's chief engine for growth over the past decade — shocked the world last week with a bombshell announcement that it wanted to defer for at least six months payments on some of its $60 billion in debts.
The call for a 'standstill' in repaying debts was viewed by some ratings firms as a default and roiled global markets, stirring fears that the global economic recovery was on shakier footing than many had believed. Even as the broader economic fears subsided, Dubai officials further unsettled investors by saying that Dubai World's debts were its own, not the government's.
The downgrades to the issuer credit ratings of the six government-related entities "reflect our lowered expectations regarding the likelihood of extraordinary support from the Dubai government," Standard & Poor's credit analyst Farouk Soussa said in a statement.
The cuts reflect S&P's "opinion that the Dubai government (not rated), while committed to supporting the ongoing operations of its GREs, does not consider these GRE's credit standing or financial obligations as its priority responsibilities," the agency said in the statement.
The companies affected were DIFC Investments LLC, DP World Ltd., Jebel Ali Free Zone, Dubai Multi Commodities Centre Authority, Dubai Holding Commercial Operations Group LLC, and Emaar Properties PJSC.
Two of the companies, DP World and Jebel Ali Free Zones are subsidiaries of embattled Dubai World, but neither have been included by the conglomerate in its debt restructuring talks with creditors. Their ratings were cut from BBB- to to BB+.
DHCOG is a subsidiary of Dubai Holding, an investment firm in which Dubai's ruler, Sheik Mohammed bin Rashid Al Makhtoum owns a roughly 97 percent stake, according to Zawya.com, a Middle East business information site. It's rating was downgraded to BB+ from BBB+.
Fitch Ratings on Wednesday said it had also cut DHCOG's ratings from BBB-, to BB or junk status.
Dubai World's problems are a window into those of Dubai, one of seven semiautonomous city-states that make up the United Arab Emirates. The conglomerate is Dubai's biggest government-held company and has served as a key force behind the emirate's growth — an expansion built on access to cheap and easy credit over the past decade.
But as the global meltdown battered equity markets, dried up credit sources and sent real estate prices into a free-fall, Dubai lost its momentum and projects were scrapped or canceled.
Real estate prices in Dubai fell by 50 percent in a year, meaning that developers — many of whom are Dubai-owned — were left holding lavish homes and properties they could ill afford to sell at a discount and cover their obligations.
But their debt woes exposed the international and local banks that pumped billions into Dubai to greater risks.
In a separate statement Thursday, S&P also cut the ratings of four Dubai-based banks because of their exposure to Dubai World and other government-backed companies from A- to BBB — still considered investment grade.
The downgrades affected the long-term counterparty credit ratings on Emirates Bank International PJSC, National Bank of Dubai and Mashreqbank, as well as the long and short-term counterparty credit rating on Dubai Islamic Bank. All remain on negative creditwatch.
Emirati banks have a strong exposure to Dubai World, but analysts have downplayed the likelihood they would face serious challenges given the UAE central banks' previous efforts to support the country's financial institutions.
Following Dubai World's debt trouble disclosure, the central bank reaffirmed its commitment to back local and foreign banks in the country and said it would make available a special liquidity facility at a cut-rate price. The move was widely seen as aimed at warding off a run on the banks.