Fitch downgrades two Dubai corporates

This came as follows:

- DHCOG:

- Long-term IDR downgraded to 'BBB-' from 'A-'; placed on Rating Watch Negative (RWN)

- Senior unsecured rating downgraded to 'BBB-' from 'A-'; placed on RWN

- Short-term IDR downgraded to 'F3' from 'F2'; placed on RWN

- DEWA:

- Long-term IDR downgraded to 'BBB-' from 'A-'; Outlook Negative

- Senior unsecured rating downgraded to 'BBB-' from 'A-'

- Short-term IDR downgraded to 'F3' from 'F2'

- Dhs3.2bn 2013 Sukuk issued by DEWA Funding Limited downgraded to 'BBB-' from 'A-'

The above corporate entities have strong operational and strategic ties with the Dubai government and the downgrades reflect Fitch's re-assessment of the ability of the Dubai government to support them. This follows the Dubai Department of Finance's announcement on 25 November 2009 related to the restructuring of government-owned Dubai World's financial obligations, including those of its property development subsidiary Nakheel. Fitch believes that the announcement reflects a clearer delineation of support by the Dubai government for direct sovereign and indirect quasi sovereign obligations.

Although the clearer delineation of direct sovereign and indirect quasi-sovereign obligations and yesterday's other announcement of $5bn in funding from two majority Abu Dhabi government-owned banks are supportive of Dubai's creditworthiness, the proposed standstill on Dubai World and Nakheel obligations is a major negative shock to sentiment in Dubai, the UAE and the region more generally, where sovereign support has traditionally been strong. This will put further pressure on entities that need to refinance, at least in the short-term, until details of the Dubai World restructuring become clear. With Dubai's overall refinancing needs not expected to peak until 2011, the migration of quasi government obligations to the sovereign balance sheet is likely to continue. Dubai government debt is now $26.3bn, equivalent to one-third of projected 2009 GDP and three times budget revenue. Financing flexibility will have been further reduced by news of the restructuring for Dubai World obligations.

The RWN on DHCOG results from a need for Fitch to obtain a clearer understanding on the specifics of Dubai World's restructuring and the implication this may have for the agency's current assumption on the level of sovereign support which should be factored into DHCOG's ratings.

Fitch will attempt to resolve the RWN on DHCOG's ratings within the coming weeks as further details are obtained related to Dubai World's restructuring. A key date will be marked by the 14 December 2009 maturity of Nakheel's $3.5bn Sukuk bond. For clarity, at the current time, Fitch's assumption continues to be that the linkage between the Dubai sovereign and DHCOG is strong and warrants an IDR for DHCOG which is consistent with the agency's assessment of Dubai's creditworthiness. Should the agency ultimately conclude that sovereign support for DHCOG is weaker than currently assumed, a further downgrade of DHCOG's ratings, possibly by more than one notch, could occur.

DEWA's rating is constrained by Dubai's credit profile. DEWA's ratings continue to be supported by its position as the exclusive vertically integrated electricity and potable water utility in Dubai, consistently improving efficiency levels, and a modern asset base. While investment requirements are likely to impact its future financial profile, key credit ratios are expected by Fitch to remain commensurate with a solid investment grade rating.

The government's involvement in DEWA continues to manifest itself in numerous ways, including through the appointment of board members and the setting of electricity and water tariffs. DEWA also closely coordinates its strategic plan, annual budget and funding plans with the government. In addition, DEWA sources its gas, which is the primary fuel needed to fire its generation plants, from the Dubai Supply Authority, DUSUP. As a result of strong legal, operational and strategic links with the Emirate, DEWA's creditworthiness will continue to move in tandem with that of the sovereign. Given DEWA's status, Fitch does not believe that holders of non-sovereign guaranteed DEWA debt are in a materially weaker position and therefore no downward notching is required.

For both DHCOG and DEWA Fitch uses a top-down rating methodology to reflect the corporate and sovereign linkages.

DHCOG is effectively 97.4%-owned by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and ruler of Dubai. DHCOG is highly strategic in the development of Dubai and continues to receive financial support from the Dubai government including the provision of substantial amounts of free land.

DEWA is fully owned by the government of Dubai and is of strategic importance to Dubai's economic development.