(The following statement was released by the rating agency) Overview
-- Dubai-based real estate and financial investments group DIFC Investments LLC (DIFCI) has announced a new $1.04 billion bank facility, which we understand it intends to use with existing cash to refinance all short-term debt.
-- We continue to believe that there's a "very high" likelihood that the Dubai government would provide timely and sufficient extraordinary support to DIFC Investments if needed.
-- We are affirming our 'B+' long-term and 'B' short-term ratings on DIFCI and removing both ratings from CreditWatch negative.
-- We are maintaining our 'ccc-' assessment of DIFCI's stand-alone credit profile, given our view of its highly leveraged financial risk profile.
-- The stable outlook reflects our view of the continued very high likelihood of government support for DIFCI, including support for the refinancing of the $1.25 billion sukuk due June 13, 2012. Rating Action On June 5, 2012, Standard & Poor's Ratings Services affirmed its 'B+' long-term and 'B' short-term corporate credit ratings on Dubai-based real estate and financial investments group DIFC Investments LLC (DIFCI). At the same time, we removed the ratings from CreditWatch, where we had placed them with negative implications on April 25, 2012. The outlook is stable. Rationale The affirmation follows DIFCI's public announcement of a new $1.04 billion bank facility. Together with existing cash balances, we understand this facility should enable DIFCI to refinance all outstanding debt (bank loans and sukuk), other than the $1 billion of government loans maturing in 2013-2014. The 'B+' long-term rating on DIFCI reflects our 'ccc-' assessment of DIFCI's stand-alone credit profile (SACP). The SACP is based on our opinion that the group's financial risk profile is highly leveraged; its very low operating cash flow relative to its debt burden, with limited scope for improvement; and its reliance on ongoing government support. We have, however, factored in our view of the "very high" likelihood that the Government of Dubai (not rated) would continue to provide timely and sufficient financial support to DIFCI, based on its role as the infrastructure provider of the Dubai International Financial Centre (DIFC; the free zone). We consider DIFCI to be a government-related entity (GRE). Under our methodology for rating GREs, we factor into the long-term rating five notches of uplift from the SACP based on our assessment of a "very high" likelihood of the Dubai government's support to DIFCI. We base our opinion on what we consider to be DIFCI's:
-- "Very important" role that it plays in the Dubai economy, given the DIFC's role in providing a platform for financial services firms in the region; and
-- "Very strong" link with the Dubai government, which fully owns DIFCI and has a track record of providing ongoing funding for the company. Other factors weighing on the ratings include DIFCI's weak cash flow from noncore investments and high execution risk in its noncore asset disposal program. DIFCI continues to depend on support from the government for the funding of its operations. In our base-case scenario, we assume that the government loans will be rolled over and the interest moratorium on these loans extended as necessary. The heavily oversupplied Dubai office market outside the free zone, combined with competition from other regional financial centers, led to rent and fee reductions in 2011, though higher occupancy rates compensated for this. DIFCI's credit strengths include, in our opinion, the strong market position of DIFC and the relatively stable cash flows that it provides DIFCI as its main infrastructure provider. On Dec. 31, 2011, DIFCI's total debt stood at about $2.4 billion. Liquidity We assess DIFCI's liquidity as "less than adequate," according to our criteria, with a ratio of liquidity sources to uses of about 1.0x over the next 12 months. Our liquidity assessment acknowledges government support, particularly the direct involvement of government and government agencies in the financing of the company. We assume DIFCI's principal sources of cash over the coming 12 months to be:
-- Holding company cash and cash equivalents of approximately $0.4 billion by our estimates at June 4, 2012;
-- $1.04 billion in new bank financing; and
-- Relatively small, but positive, operating cash flow after capital expenditures in 2012. We assume the group's principal uses of cash over the coming 12 months will be:
-- Debt maturities of about $1.4 billion, including a $1.25 billion sukuk due June 13, 2012, and $147 million of short-term bank loans. We assume asset disposals will meet debt amortization requirements under the new $1 billion bank facility. Two further loans of $500 million each from the Dubai government all due in December 2013 and April 2014, respectively. We believe, however, that these loans will be rolled over for the foreseeable future and until DIFCI is in a stronger position. Outlook The stable outlook reflects our view of the continued very high likelihood of government support for DIFCI, which mitigates the group's very high financial leverage and its need to sell noncore assets to meet scheduled debt payments under the new bank facility. We expect the group to repay the $1.25 billion sukuk that matures on June 13, 2012. We could lower the ratings on DIFCI if we lowered our government support assumptions. We would lower the long-term rating on DIFCI by two notches to 'B-' if we revised our assessment of the likelihood of government support to "high" from "very high." The possibility of an upgrade is very remote at this stage, in our view, as DIFCI's business and debt leverage (including government loans) do not currently show signs of sustainability. Related Criteria And Research
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch Action
To From DIFC Investments LLC Corporate Credit Rating B+/Stable/B B+/WatchNeg/B (Caryn Trokie, New York Ratings Unit)