Standard & Poor's Ratings Services said today that it lowered its long-term corporate credit rating on Abu Dhabi-based property company Aldar Properties PJSC (Aldar) to 'B' from 'BB-'. Standard & Poor's also said that it placed the 'B' long-term and 'B' short-term ratings on CreditWatch with negative implications.
"The downgrade reflects our view of the very challenging real estate market conditions in Abu Dhabi and the reliance of Aldar's future earnings and cash flow on continued demand for both the sale and rental of property and land," explained Standard & Poor's credit analyst Tommy Trask. New sales of residential units and land are extremely slow, and delays in handover hurt the company's earnings and cash flow in the first nine months of 2010. The company is also experiencing problems collecting land receivables, 30%-40% of which are overdue. Based on the pipeline of new supply, both in Abu Dhabi and Dubai, we do not anticipate an improvement in market conditions anytime soon. As of Sept 30, 2010, Aldar's total debt (as adjusted by Standard & Poor's) was 30.4 billion United Arab Emirates dirham (AED).
The 'B' rating on Aldar is based on our view of the company's stand-alone credit profile (SACP) of 'ccc+', which incorporates an element of ongoing government support, plus two notches of uplift reflecting our opinion that there is a moderately high likelihood that the Abu Dhabi government would provide timely and what we view to be sufficient extraordinary support to Aldar in the event of financial distress.
Our assessment of Aldar's stand-alone credit profile reflects weak property market fundamentals, particularly relating to residential and land sales, which are a key driver of cash-flow generation, large funding needs, high debt levels, and limited operating history. In our opinion, Aldar's credit strengths include its market position, large land bank, close relationship with the government in project planning and management, and growing investment property portfolio.
The rating on Aldar also reflects what we see as its highly leveraged financial risk profile. In the four quarters through Sept. 30, 2010, the group reported significant losses and cash burn (before and after capital expenditures), predominantly because of lower property deliveries and sales. We anticipate negative discretionary cash flow in the final quarter of 2010. We believe the long-term prospects for the group generally depend on future demand for both sales and rental of real estate in Abu Dhabi.
