June 5, 2012 / 1:46 PM / 5 years ago

TEXT-S&P affirms DIFC Investments LLC

 (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)	
 

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