Thursday, August 5, 2010

Aldar Properties - S&P Lowers Rating to "Junk"

S&P has lowered Aldar's ratings to BB- from A-.   That's a more than one step change! Outlook is negative.  So S&P's message is a significant negative.
"We understand that despite relatively sound overall supply demand fundamentals in the Abu Dhabi property  market," added Mr. Trask, "Aldar has been significantly affected by spill-over effects from the heavily oversupplied Dubai real estate market, characterized by significant declines in rental and market values."

This is having a negative effect on both the demand for, and the price achieved by, Aldar for the sale of real estate in Abu Dhabi.  Based on the pipeline of new supply both in Abu Dhabi and Dubai, we do not anticipate a reversal of this situation anytime soon. 
Two items worthy of comment:
  1. The last sentence "We do not anticipate a reversal of this situation anytime soon."   S&P's ratings action also reflected a revision of their assumption re likely government support.
  2. Ascription of Aldar's problems to the "spillover" from Dubai.
 On the negative outlook.
We are also assigning a negative outlook, which reflects our view regarding Aldar's future  profitability and cash flow generation in light of the challenging market conditions.


the real nick said...


Have you read Nassim Nicholas Taleb's "Black Swan"? I wonder what you would make of it...

Abu 'Arqala said...


I keep meaning to but haven't yet.

Though I've read some of his articles.

Not sure I buy his criticism of VAR. Rather than a fundamental flaw in the concept, I think there was a fundamental flaw in the application. People thought it did more than it does.

What's your opinion of his work?

the real nick said...

I am a skeptic in all aspects of life. Especially I ma skeptic of predictions of any sort and in particular of economic predictions and models. Construction teaches you that budgets and timelines are always too tight at the outset because the potential of human error and incompetence is limitless. Once stung, twice shy.

What lingers in the back of my mind are events like the collapse of the fund managed by Mssrs. Myron Scholes and Robert Merton, LTCM "Long term (sic) capital management" that went bust in the late 90s...Yes, that's the Mssrs. Scholes and Merton who got the Nobel prize for their mathematical model whizzery...

I read the book (Black Swan) in early 2008 (it was published in late 2007). Taleb noted for example that in his opinion Fanny Mae and Freddie Mac were sitting on barrels of dynamite, smoking fat cigars...he identified their risk exposure, as well as that of many large banks because of their connectivity and 'herding' mentality: fund managers and analysts citing themselves like frenzied Ouroborosses, saying, believing and doing the same things on ever larger scales.

Taleb's been right about a great many things and not in retrospect like most economists and politicians who are a bunch of self-serving liars to begin with.

Who would I rather believe?

laocowboy2 said...

A- to BB- is a massive six notch drop. It says two (or possibly three things). The first is that S&P now realises that it got the original rating very wrong indeed. The second is that they do not believe that meaningful support will be forthcoming should Aldar get into (more) trouble. The possible third is (my belief) that S&P haven't a clue about the region as a whole and, having been hoodwinked by all the gloss and spin earlier are now doing a massive CYA by cratering all ratings in the region. My real question however is what possible use as an aid to credit decisions are ratings that swing so wildly?

Abu 'Arqala said...


It's likely a combination of factors.

My interactions with ratings in the area suggest that in at least several cases much slips by.

I recall when one of my colleagues brought a "good lending" opportunity with an investment grade bank in Bahrain to our regional investment committee. A rather cursory review of their financials disclosed there was no meaningful cash inflow. But a heck of an outflow for bonuses, operating expenses, dividends -- all financed with debt. Plus what appeared to be a bit of "Accounting Magic" with fair values. I put a spike in that great idea.

Then there was another firm from the same country who suddenly decided its natural business cycle ended in June and needed to change its fiscal year. The analyst covering them for one of the major ratings firms took the story at face value - missing the temporal link to the revised accounting principles for off balance sheet vehicles in the wake of Enron.

That being said, one can use ratings firms' work to advantage. Much of what they publish on industry analysis is highly useful. Their number crunching and access to management info may be enlightening. But at the end of the day there is absolutely no substitute for reading the financials oneself.

Laocowboy2 said...


And for eye-balling the prospective borrower/counterparty as well. Walked away from a number of "good" deals as a result, not always to immediate support from colleagues but to my usual eventual satisfaction.

Abu 'Arqala said...


An excellent point. A lot of credit decisions can be quickly and accurately made in that way.

Anand Sharma said...
This comment has been removed by a blog administrator.