Moody's upgrades SHUAA Capital psc to Ba2; stable outlook

Moody's decision follows the reassessment of Shuaa's financial condition and prospects, following the conversion of Dhs1.5bn notes into Shuaa's equity that was issued to the Dubai Banking Group, the subsidiary of Dubai Holdings, as well as signs of gradual improvement in the investment environment in the countries in which Shuaa operates.

Moody's believes that Shuaa is entering a new era with a new shareholding structure and a newly appointed chief executive officer, and expects the renewed association with Dubai Holdings to benefit the company both in terms of new business prospects as well financial support. However, Moody's notes that any further uplift to the ratings is constrained by the vulnerabilities of the emirate of Dubai and the structural funding problems faced by the government-related entities of Dubai (known as "Dubai Inc.").

"Shuaa's main challenges include its capacity to rebuild a strong recurring earnings base, away from volatile mark-to-market investment adjustments, as well as diversifying its funding base so as not to depend on short-term callable credit lines. If Shuaa satisfactorily manages to address these two key issues, while maintaining strong capitalisation levels, then it could generate some upward pressure on its ratings over the medium term,"

explains John Tofarides, Moody's lead analyst for Shuaa.

Moody's previous rating action on SHUAA was implemented on 29 June 2009, when the rating agency changed the direction of the ongoing ratings review of Shuaa to a review for possible upgrade from a review for possible downgrade. The change in the direction of the review was prompted by the resolution of the dispute between Dubai Banking Group and Shuaa regarding the convertibility attributes of the notes that were later converted into Shuaa's equity, under the auspices of Emirates Securities and Commodities Authority.

The principal methodology used in rating Shuaa is the "Global Securities Industry Methodology", which is available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Established in 1979, Shuaa is one of the oldest and leading investment banking institutions in the Gulf region. It is actively involved in public and private capital markets in the Arab region generally, with a special emphasis on the UAE and the five other members 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.