Moody’s downgrades Abu Dhabi’s Aldar Properties, review for further downgrade

Moody's Investors Service has downgraded the issuer rating for Aldar Properties PJSC, one of the largest property developers in Abu Dhabi, by two notches to Ba3 from Ba1 and assigned a probability of default rating (PDR) of Ba3. Moody's has also implemented a three-notch downgrade to B1 from Ba1 of the ratings for Aldar's USD 1.25 bln bond (due 2014) as well as for its AED 3.75 bln sukuk (due 2013).
All ratings remain on review for further possible downgrade driven by Moody's assessment that Aldar's H1 results and the weak state of the Abu Dhabi property market have furtherweakened the standalone creditworthiness of Aldar.
Although Aldar has stated that it expects to achieve significant project completions and increase opportunities for revenue recognition in H2 2010, Moody's cautions that the company's cash flow generation remains weak. Indeed, Aldar's retained cash flow for the past 12 months ending June 30 reported a loss of AED3.5 bln, whilst free cash flow also recorded a loss of AED 10.0 bln for the same period, although it has been improving over recent quarters.
Although Aldar had cash and bank balances of nearly AED 7.9 bln at the end of June, Moody's noted that the company faces a number of significant debt maturities over the coming 12 months. These maturities come at a time when Aldar has little amounts available under undrawn and existing bank facilities and its ability to refinance is less certain given that free cash flows are expected to remain negative.
In particular, Moody's highlights the July 2011 syndicated infrastructure loan, of which AED6.38 billion was outstanding at the end of Q2, as well as the convertible bond of AED 4.3 bln.
Moody's has also lowered its shareholder support assumptions for Aldar to moderate from high as actions over recent months have possibly demonstrated a different stance towards the timeliness of support, which Moody's considers to be less certain.
Firstly, the commercial transfer of the Yas Island assets to the government has created uncertainties regarding the timeliness of government support.
Secondly, the majority of government funding of around AED 2.8 bln has been classified as a non-current receivable, thereby raising questions over whether the funds will be provided when Aldar requires them given its potential tight liquidity situation in the future as debt obligations begin to mature.
Overall, Aldar's ratings continue to reflect the links between the company and the government, which has not only been providing Aldar with a significant share of new projects since 2009, but has also been providing ongoing support via loans and other forms of financing.
Moody's is maintaining the review for possible downgrade of Aldar in order to assess whether Aldar's main shareholders, which are linked to the government of Abu Dhabi and hold an aggregate stake of 37.9% in the company, would still act in concert and provide exceptional and timely financial support which Moody's believes will become necessary to bolster Aldar's liquidity profile over the next 24 months.