Over the next two years, Abu Dhabi real estate developer Aldar Properties will profit from the sale of a series of eye-popping local assets to the emirate’s government. They include Ferrari World Abu Dhabi (a glitzy indoor theme park based on the Italian sports car) and related infrastructure on Yas Island, a 6,200-acre site off the coast of Abu Dhabi city that Aldar has transformed into an upscale entertainment center.
These sales are part of an 19 billion dirham ($5.2 billion) rescue package to keep the cash-strapped public company afloat. The second government bailout of Aldar inside of a year, the deal highlights the financial woes of the United Arab Emirates’ real estate developers, who not long ago could count on stable property values to fund their construction projects.
The emirate has good reason to prop up Aldar, its largest developer and a key player in Abu Dhabi 2030, an ambitious plan to turn the capital into a business magnet and tourist destination. Launched in 2004, when global real estate markets were still booming, Aldar got into trouble by piling up short-term debt like many of its UAE peers did. “The financing made sense at the time, under the assumption the debt easily could be rolled over or repaid with proceeds from property sales,” explains Chet Riley, an equity analyst at Nomura International in Dubai.
But with Abu Dhabi property values down 30 percent since 2008, sales are sluggish and financing is tough. “The crux of Aldar’s difficulties was that the major portion of its outstanding debt — approximately AED14 billion — comes due in 2011 and 2012,” Riley says.
Aimed at strengthening Aldar’s balance sheet, the bailout includes AED16.4 billion in asset sales, an AED10.5 billion impairment charge and an AED2.8 billion convertible bond. Aldar, which has posted operating losses for five straight quarters, lost AED12.7 billion in 2010 after the impairment charge. CFO Shafqat Malik says the company will return to profitability this year, but analysts question its ability to sustain positive earnings. “Aldar still does not have a significant income-producing portfolio,” says Jad Abbas, a Dubai-based equity analyst with investment bank EFG Hermes.
Aldar issued the convertible bond on March 7, placing it with government investment vehicle Mubadala Development Co. The bond pays a coupon of 4 percent — higher than most analysts expected — and must be converted into equity in December at a strike price of AED1.75 to AED2.30 per share. As of March 31, Aldar’s stock was trading at about AED1.50. The bond, which raises Abu Dhabi’s stake in Aldar from 40 to 64 percent, has observers betting the government will keep supporting the developer.
Aldar’s Malik says the new framework is in the best interests of all stakeholders: “It has strengthened the capital structure and positioned the company for sustainable, long-term growth.” But shareholders don’t like the impairment charge, which waters down their equity. “Significant ownership dilution has occurred,” Abbas says.
The asset sales and convertible bond will generate enough cash to meet Aldar’s debt obligations. But there’s concern that the company’s assets, particularly its hospitality portfolio, remain overstated. For this reason, Abbas doesn’t rule out another impairment charge in the medium term. “Short-term the restructuring solves the problem, but longer-term there is still a funding gap,” notes Tommy Trask, an equity analyst at the Dubai office of Standard & Poor’s.
Given its high capital expenditures, Aldar must roll over or refinance some short-term debt by the second half of this year. Trask expects the developer to secure extra funding from banks or the capital markets, reasoning that the balance-sheet overhaul should make it easier to obtain straight debt with maturities that more closely match the timelines of its remaining projects. He also thinks Aldar may get more help in the form of government-sponsored work, asset acquisition and loans from government-controlled banks.
“It’s very positive from a credit standpoint,” Trask says of the restructuring. Meanwhile, shareholders pay the price for Aldar’s extravagances.
