S&P on DEWA's improved credit quality

SP_DEWA

The upgrade of the note principally reflects Standard & Poor's (S&P) assessment that Dubai Electricity and Water Authority's (DEWA) stand-alone credit profile (SACP) which has improved.

S&P's Rating Services raised to 'BBB' from 'BBB-' its issue ratings on the senior secured callable floating-rate notes under Thor Asset Purchase (Cayman) Ltd's (Thor) US$4 billion medium-term note program. S&P factor this into their assessment of Thor's SACP of 'bb-'. The improvement is largely a result of its opinion that DEWA's financial profile has strengthened.

S&P rate Thor using its criteria for government-related entities, because, in its opinion, there is an "extremely high" likelihood that the Emirate of Dubai (not rated) would provide timely and sufficient extraordinary support to Thor in the event of financial stress, in view of: The "very important" role Thor plays in providing funding to DEWA, which has a monopoly over generation, transmission, and distribution of power in Dubai; and its "integral" link with the Emirate, given the Dubai government's performance guarantee with regard to DEWA's obligations to Thor under the Thor transaction.

In S&P's analysis of Thor, its SACP includes its analysis of DEWA's credit quality. This is because, for example, DEWA originates the receivables under the receivables purchase agreement, and is required to grant non-repayable liquidity advances to Thor if the funds available to it at any settlement date are insufficient to pay obligations due to noteholders. DEWA also assumes exchange rate risk under its obligations to Thor.

S&P considers that DEWA's SACP has improved primarily as a result of a reduction in refinancing risk, for example through the repayment of about AED5.4 billion of debt in April 2011 (including a prepayment of the October AED2.7 billion debt obligation under its syndicated loan) through proceeds from last year's medium-term note issuances.

In addition, DEWA was able to successfully increase tariffs by about 15 per cent in January 2011 which, in S&P's opinion, will likely support DEWA's financial metrics over the short to medium term, thereby improving its financial risk profile, although S&P continues to consider this to be "aggressive." As part of S&P's 'bb-' estimate of DEWA's SACP (excluding extraordinary support from the Dubai Emirate), it also considers DEWA as having a "fair" business risk profile.

S&P understands from DEWA that collections up to early June, from receivables have been robust above the contractually defined minimum collection amounts, and comfortably above the amounts necessary to pay full debt service. If collections from the pledged receivables decline, DEWA has, in S&P's view, a relatively comfortable cushion of unencumbered receivables that can be added to the portfolio. Neither the liquidity line granted by DEWA nor the government performance guarantee has been called to date.

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