Fitch Ratings has just put out an update saying that Etisalat could have its AA- credit rating downgraded if the federal government does not make it clear exactly how much it is willing to cover the company's debts.
This is interesting because as far as I know, Etisalat is not in a lot of debt, and is sitting in many billions of dollars in cash reserves.
The report also raised bigger questions about the credit worthiness of the Dubai government, downgrading the ratings of two major Dubai government companies, including DEWA, the electricity and water utility. While there is a general belied that Dubai's major corporations have the implicit backing of the federal government (and therefore, Abu Dhabi's massive oil reserves), Fitch said that this backing needs to be made more explicit.
According to Fitch, questioning of federal support:
"Reflects the increasing demands on its relatively small fiscal resources during the current period of economic stress [...] the increased risk that contingent liabilities arise from the exercise of its responsibility to ensure financial stability across the UAE, combined with the federal government's limited fiscal and financial flexibility, has weakened the UAE sovereign credit profile. Although the sovereign credit remains strong, the lack of clarity on the process for non-budgetary financial transfers between the UAE federal government, central bank and individual emirates, is a source of weakness."
Read on for the full report from Fitch.
-------PRESS RELEASE-------
FITCH DOWNGRADES ONE UAE AND TWO DUBAI CORPORATES
Fitch Ratings-Istanbul/London/Barcelona-24 September 2009:
Fitch Ratings has today taken rating actions on two Dubai
companies - Dubai Holding Commercial Operations Group LLC
(DHCOG) and Dubai Electricity and Water Authority (DEWA) - and
one U.A.E. corporate - Emirates Telecom Corp (Etisalat) - as
follows:
DHCOG
Long-term IDR downgraded to 'A-' from 'A+'; Outlook Negative
Senior unsecured rating downgraded to 'A-' from 'A+'
Short-term IDR downgraded to 'F2' from 'F1'
DEWA
Long-term IDR downgraded to 'A-' from 'A+'; Outlook Negative
Senior unsecured rating downgraded to 'A-' from 'A+'
Short-term IDR downgraded to 'F2' from 'F1'
AED3.2bn 2013 Sukuk issued by DEWA Funding Limited downgraded
to 'A-' from 'A+'
Etisalat
Long-term IDR of 'AA-' placed on Rating Watch Negative.
The above corporate entities have strong operational and
strategic ties with the Dubai and UAE governments respectively
and the actions reflect Fitch's view that the credit profiles
of the sovereign entities have weakened and lower certainty as
to how any government support may be provided. Fitch uses a
top-down rating methodology to reflect the corporate and
sovereign linkages (please refer to the agency's criteria
report "Parent and Subsidiary Rating Linkage" on
www.fitchratings.com). The rating of Etisalat has been placed
on Rating Watch negative while further clarification on support
mechanisms is sought. Any downgrade of Etisalat's rating
resulting from the Rating Watch is not expected to exceed one
notch, and the Watch is expected to be resolved in the next two
weeks.
Fitch's revised view of the UAE sovereign reflects the
increasing demands on its relatively small fiscal resources
during the current period of economic stress. In Fitch's
opinion, the increased risk that contingent liabilities arise
from the exercise of its responsibility to ensure financial
stability across the UAE, combined with the federal
government's limited fiscal and financial flexibility, has
weakened the UAE sovereign credit profile. Although the
sovereign credit remains strong, the lack of clarity on the
process for non-budgetary financial transfers between the UAE
federal government, central bank and individual emirates, is a
source of weakness.
The Emirate of Dubai's creditworthiness is weakening as
obligations of its wider public sector migrate to the sovereign
balance sheet. By the end of 2009, Dubai government debt will
have tripled to USD30bn compared to a year ago, approaching 40%
of GDP. The corporate sector, including state-controlled
companies, remains under financial pressure amid the global
economic downturn and is going through an ongoing process of
rationalisation. However, the capacity of the Dubai government
to support the corporate sector is constrained by its small and
narrow revenue base and limited financing flexibility. Although
the authorities have indicated plans to issue a second bond
tranche of the same size as that which was placed with the UAE
Central Bank in February (USD10bn), the source and timing of
this issue is uncertain. Nonetheless, an intensification of
financing pressures on the corporate sector and state-owned
companies in particular, if not accompanied by an increase in
the resources at the authorities' disposal, would likely result
in a further material weakening of Dubai's credit profile.
DHCOG is effectively 97.4%-owned by His Highness Sheikh
Mohammed Bin Rashid Al Maktoum, Vice President and Prime
Minister of the UAE and ruler of Dubai. DHCOG is highly
strategic in the development of Dubai and continues to receive
financial support from the Dubai government including the
provision of substantial amounts of free land.
For DEWA, the government's involvement manifests itself in
numerous ways, including its appointment of board members and
the setting of electricity and water tariffs. DEWA also closely
coordinates its strategic plan, annual budget and funding plans
with the government. In addition, DEWA sources its gas, which
is the primary fuel needed to fire its generation plants, from
the Dubai Supply Authority, DUSUP. DEWA's ratings continue to
be supported by its position as the exclusive vertically
integrated electricity and potable water utility in the Emirate
of Dubai, consistently improving efficiency levels, and a
modern asset base. However, investment requirements are likely
to impact its future financial profile, although the revamped
regulatory frameworks for electricity and water tariffs offer
some mitigation to the forecast deterioration in the financial
profile.
Etisalat is 60.03%-owned by the UAE, and it is stipulated by
law that state ownership cannot go below 60%. Fitch views
government support as integral to the company's target to
become a major telecoms operator, with seven out of 11 of the
Board of Directors being government representatives, including
the Chairman.
