Firms may need help on debt

Fitch report affirmed Abu Dhabi's "AA" rating with a stable outlook going forward while Abu Dhabi Government-linked companies may need sovereign help.

Abu Dhabi Government-linked companies may eventually have to call on the sovereign to service their debts.

Abu Dhabi Government-linked companies may need sovereign help to service their debt obligations, the ratings agency Fitch said yesterday. The emirate's external debt, excluding banks, had risen to US$54 billion (Dh213.03bn) last year. And state-owned companies raised an additional $18bn in external bonds and loans so far this year, according to the Fitch report. It affirmed Abu Dhabi's "AA" rating with a "Stable" outlook.

"With a variety of quasi-sovereign entities borrowing, the risk grows that one may eventually have to call upon the sovereign to help it service debts," the report says. Abu Dhabi has been encouraging its companies to invest in manufacturing, tourism and renewable energy to diversify its economy and reduce its dependence on income from hydrocarbons. A $5.6bn computer chip investment and an $8bn joint venture with General Electric are the most recent examples of the emirate extending its global investment reach.

"The overall [Abu Dhabi debt] figures don't seem to suggest anything of a crisis mode," said Fahd Iqbal, the vice-president at EFG-Hermes Research. "In fact, the report even insinuated that overall debt levels are below the median and that is what one would expect. "Only recently there was a meaningful pickup in investments as Abu Dhabi started to extend its footprint through government entities such as Mubadala, Aabar and IPIC." Fitch said it was unlikely that Abu Dhabi would be required to help neighbouring Dubai repay an estimated $80bn in outstanding debt. "Abu Dhabi is under no obligation to prevent other emirates from defaulting on their debts, and Fitch regards a direct bilateral transfer as unlikely," the ratings agency said.

Dubai needs to repay $6.8bn of external debt by the end of this year, according to a separate report by Deutsche Bank and an average of $12.5bn a year over the next three years. "We do not see any issues with Dubai's ability to pay," said Caroline Grady, the economist at Deutsche Bank and author of the report. The Dubai Government's pledge to support its entities through a second $10bn bond indicates the sheikhdom's "willingness to pay", Ms Grady said.

Ratings agencies have downgraded some Dubai entities such as DP World on concerns that the emirate may not be able to repay its debt. They have based their ratings on continuing uncertainty over the repayment of a $3.5bn Nakheel sukuk that matures in December. The bond is widely considered a litmus test for Dubai's ability to service its debt. Dubai does not have a sovereign rating. Instead, agencies assume a rating, (which they don't disclose), when assessing Dubai-owned companies.

By contrast, Fitch stressed that Abu Dhabi's financial position remains one of the strongest of any rated country in the world, with external assets valued at more than 200 per cent of the country's GDP for last year. That takes it above Saudi Arabia, which is rated "AA minus". "Abu Dhabi's strong balance sheet enables it to weather most conceivable shocks," said Charles Seville, the associate director in the sovereign group at Fitch. Fitch said the emirate had partially retraced some of the losses it incurred last year due to the falls in the price of oil and declining equity markets.

It said the decline of Abu Dhabi Investment Authority's investment portfolio last year was in line with global counterparts such as the massive US state pension fund CalPERS and Norway's Government Pension Fund, each of which lost about 20 per cent of their value. [e-mail]