Moody's assigns Baa2/P-3 ratings to SHUAA Capital psc

According to Moody's, the ratings reflect SHUAA's solid track record as one of the few leading regional investment banking and securities firms in the Gulf Cooperation Council (GCC), as well as its robust capitalisation, solid brand recognition and reputation, strong financial performance despite volatile regional capital markets, ample liquidity and satisfactory operating diversification.

However, the ratings are constrained by concentration risks in both funding and the company's investors franchise, as well as by the group's imbalanced wholesale funding continuum, its still evolving risk management and corporate governance architecture, and increasing domestic, regional and international competition in the GCC investment banking industry and securities business.

SHUAA's Baa2 long-term ratings benefit from a two-notch uplift from their Baseline Credit Assessment (BCA) of Ba1, reflecting Moody's expectation that shareholder support would be likely in case of need. Support is expected to be made available by SHUAA's single largest shareholder, Dubai Banking Group (DBG), which will own 32% of SHUAA's capital from 31 October 2008 onwards. DBG is one of the investment arms of the Government of Dubai, and is jointly owned by Dubai Holding (70%) and Emaar Properties (30%).

In November 2007, DBG signed an agreement to subscribe to Dhs1.5bn in convertible bonds issued by SHUAA and maturing on 31 October 2008.
Upon conversion, SHUAA's outstanding shares will then be increased from the current 550 million shares to 800 million shares and total shareholders' equity will rise to more than Dhs4bn. The respective stakes of the current largest shareholders are therefore expected to drop to: 7.43% for the Al-Ghurair family, 5.02% for NBK Trust, and 4.07% for the Al-Sager family.

Moody's notes that SHUAA's BCA could improve from the current Ba1 level if the company were to maintain its strong financial performance under a more challenging, competitive and potentially volatile operating environment. It could also improve if SHUAA were to continue to enhance its risk management platform, corporate governance architecture and overall risk culture, further strengthen its funding mix with longer tenor, more diversified sources of funds and/or widen its investor base.

The rating agency believes that SHUAA's BCA enjoys strong upside potential over the medium term, given senior management's clear intention to further enhance the company's institutionalisation to both better control expansion and cope with inferred risks, the region's spectacular growth potential, increasing investor sophistication in the GCC, and the expected benefits the new single largest shareholder should bring to the company.

However, the company's BCA could face downward pressure if its cost base were to inflate to an extent that was not commensurate with its core earning capacity, if its income volatility and risk appetite were to exceed expectations, if the trade-off between balance sheet liquidity and investment gearing were to become excessively skewed towards short-term profitability, and/or if expected growth in risk assets were to exert undue pressure on capital beyond anticipated levels.

SHUAA is one of the oldest and leading investment banking institutions in the Gulf region, established in 1979. It is actively involved in public and private capital markets in the Arab region generally, with special emphasis on the UAE and the five other countries of the GCC, namely Bahrain, Kuwait, Oman, Qatar and Saudi Arabia. SHUAA handles six core business lines: principal investments, asset management, investment banking, brokerage, private equity, and finance.

SHUAA is based in Dubai, UAE, and reported total consolidated assets of $1.7bn and total equity of $1.0bn under IFRS as of 31 December 2007. SHUAA reports full-year financial statements for the fiscal year ending 31 March.