Moody's Investors Service has downgraded to B2 from B1 the senior unsecured issuer and debt ratings of Dubai Holding Commercial Operations Group (DHCOG).

At the same time, Moody's has also converted DHCOG's B2 issuer rating into a B2 corporate family rating (CFR) and assigned a probability of default rating (PDR) of B3, in line with the rating agency's practice for corporate issuers with non-investment-grade ratings. These ratings remain under review for further possible downgrade.

Moody's decision to downgrade DHCOG is based on the continued negative impact that the challenging conditions in the Dubai real estate market are having on the group's financial profile. The company recently announced significant impairments in its 2009 real estate portfolio, which resulted in a full-year loss of Dh23,568 million ($6,422 million).

DHCOG's free zone and hospitality businesses, which are managed by its fully owned subsidiaries Tecom and Jumeirah, were also negatively affected by the economic downturn, although on a relatively smaller scale. As a significant portion of DHCOG's revenues remain linked to the property sector, growth in future cash flows will be correlated to a recovery in the Dubai's weak real estate market which therefore remains an important rating driver.

The B3 PDR that Moody's has assigned to DHCOG reflects its current weak liquidity profile and near-term exposure to refinancing risk, while also taking into account the rating agency's assessment that government support would be available to meet near-term maturities, thereby reducing near-term payment default risk.

Specifically, DHCOG's maturity profile includes a $555 million revolving credit facility that matures in July 2010. Given the company's current cash position as well as expected cash generation, internal resources would not be sufficient to cover this maturity. Moody's notes that the company is already in the process of renegotiating this facility ahead of its maturity in the coming weeks.

According to Moody's, the B3 PDR and ongoing review process acknowledges the uncertainty surrounding the impact on DHCOG's capital structure of the ongoing negotiations between DHCOG and its lenders to put in place a more permanent long-term financing arrangement, taking into account the recently revised business plan and current market conditions. Therefore, Moody's decision to maintain DHCOG's ratings on review for further possible downgrade reflects the rating agency's ongoing concerns about the company's liquidity profile and how the company's debt capital structure may evolve in the near term.

The one-notch differential between the CFR and the PDR takes into account Moody's preliminary assessment that DHCOG has meaningful asset values across its various business lines, even when taking into account various distress scenarios, which suggest that, in the event of a default, recoveries to financial creditors should be above Moody's standard 50 per cent recovery assumptions.

The rating agency will continue to further refine this assessment during the ratings review as it considers (i) whether the revised business plan being reviewed will lead to sustainable cash flow generation growth and firm value creation; and (ii) whether the new terms to be negotiated will lead to a more sustainable debt capital structure. Assuming Moody's remains comfortable with the medium term sustainability of the group's business profile and stability of the group's liquidity and debt capital structure upon conclusion of the review, the PDR could become aligned with the CFR.

Moody's last rating action on DHCOG was implemented on December 8, 2009, when the rating agency downgraded the group's ratings to B1 from Ba2 and kept the ratings under review.-TradeArabia News Service