Emaar Properties CreditWatch implications revised to developing from negative following merger announcement

Rationale:

The rating action reflects the prospective benefits on Emaar's credit profile from a merger with the real estate businesses of Dubai Holding Commercial Operations Group LLC (DHCOG, A/Watch Neg/--). The developing implications also reflect the downward pressure on the ratings from the weak Dubai real estate markets if the merger is not completed.

The current ratings on Emaar reflect the group's important role and strong position in the Dubai property development market as one of three government-related master developers, and its strong relationship with, and minority ownership by, the government of Dubai (not rated). The ratings also reflect the group's low debt leverage and strong asset base. The main constraining rating factors include the inherent risks in the cyclical property development industry and the group's large exposure to the weakening of the Dubai real estate market.

On June 26, 2009, it was announced that Emaar intended to merge with the three real estate businesses of DHCOG; Dubai Properties LLC, Sama Duabi LLC, and Tatweer LLC. Like Emaar, DHCOG is one of the three large government-related master developers in Dubai. DHCOG is 97.4% owned by Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of Dubai. These are key factors for the existing ratings on DHCOG.

Details of the merger are not yet public, and it is estimated that the process of consolidation will take about four months to complete.

The combination of Emaar and DHCOG's real estate businesses would likely increase Emaar's importance in the development of Dubai, as well as increase the company's indirect government ownership. A merger would create possibilities for synergies and strengthen Emaar's position in the Dubai real estate market, which however is currently experiencing a severe market downturn, which in turn is pressuring Emaar's stand-alone credit quality. Further benefits from the merger on Emaar's credit quality will depend on the capital structure of the new entity.

Liquidity:

Emaar's liquidity position has weakened recently, but is, in our view, still adequate. On March 31, 2009, Emaar had about Dhs4.6bn in cash on a consolidated basis, of which Dhs3.9bn was held at the parent company level.

It also had about Dhs1bn in committed short-term credit facilities at the parent company level, although a major part of these were for letters of credit.

Debt maturities at the parent level are limited before 2012, when a $1bn (Dhs3.7bn) syndicated unsecured musharaka facility matures. Some of the group's credit facilities include restrictive covenants, although none is expected to constrain Emaar from drawing under the facilities.

The liquidity needs of Emaar's Dubai operations are expected to remain relatively low in the near term, as the company completed a number of investment property related spending programs in 2008, and we expect the cash needs from upcoming property developments for sale to be met from internally generated cash flows.

Emaar's short-term debt is located at international subsidiaries, and stood at a substantial Dhs5.8bn at the end of March 2009.

However, about Dhs1.5bn of the short-term debt relates to the company's U.S. subsidiary, WH Homes, operating under the name John Laing Homes (JHL). JHL has filed for bankruptcy protection from creditors. The debt in JHL is situated in a large number of individual project companies secured only by the assets of these companies. The debt is not guaranteed by Emaar, and our expectations are that Emaar will neither assume this debt nor provide any material cash support to JHL.

Furthermore, about Dhs1.8bn of the short term debt relates to the group's Turkish subsidiary, of which a major part was recently rolled over for a further 12 months.

CreditWatch:

The ratings could be raised if, following a review, we believe that the likelihood of sufficient and timely extraordinary government support is higher than we currently assume. In resolving the CreditWatch listing we will reassess Emaar's importance to the government and the development of Dubai combined with its future ownership structure within the prospective combined entity. We will also review the impact of the prospective merger on Emaar's stand-alone credit quality, and the future business and financial strategies and capital structure of the merged entity. The ratings could be lowered if the merger is not completed, as the weakening Dubai real estate markets are pressuring Emaar's business risk profile and financial position.