Tabreed downgrade as growth plans threatened
S&P revision reflects lower-than-expected H1 results
By Martin Morris
Standard & Poor's Ratings Services confirmed on Tuesday it has lowered its long-term corporate credit rating on UAE utility National Central Cooling Co. PJSC (Tabreed) to 'BB-' from 'BB'.
At the same time, the rating was placed on CreditWatch with negative implications.
In addition, the debt rating on the senior secured sukuk certificates due 2011 issued by Tabreed 06 Financing Corp., was also lowered to 'BB-' from 'BB', and the debt rating on the subordinated convertible sukuk certificates due 2011, issued by Tabreed 08 Financing Corp., was lowered to 'B-' from 'B'.
"The downgrade reflects the lowering of our assessment of Tabreed's stand-alone credit profile (SACP)," said S&P credit analyst Karim Nassif.
"The CreditWatch placement primarily reflects our view of Tabreed's tightening liquidity position during the remainder of 2009, despite our understanding of Mubadala's increasing influence over the company's operation in 2009, including facilitating year-to-date refinancings.
'Without this support, it is likely that Tabreed's SACP would be considerably weaker," Nassif added.
The weakening of Tabreed's SACP reflects the underperformance in the year to date compared with the company's guidance as set out in its December 2008 business plan.
The major areas of underperformance were: lower-than-anticipated reported profitability of AED47.2 million in the half year to June 30, 2009, compared with guidance of AED70.6 million and the previous year's figure of AED49.5 million; and the company's failure to obtain the targeted AED1.0 billion proceeds from general asset sales including to various joint ventures.
However, the agency noted Tabreed has received capex reimbursement payments of AED400 million in the year to date.
In addition, the company faces a high ongoing exposure to refinancing risk through the rollover of various short-term banking facilities, according to the agency.
While this rollover has been successfully undertaken in the year to date, the refinancing risk does leave Tabreed vulnerable to a further stress on its already weak liquidity position, it added.
Meanwhile, the CreditWatch placement primarily reflects S&P’s view on the company's liquidity position in the remainder of 2009. Tabreed still plans a significant level of capex (up to AED600 million), needs to roll over a number of banking facilities, and continues to face the challenge of improving operating cash flow relative to capex.
"We will seek to resolve the CreditWatch placement within the next two to three months once we have a clearer understanding of the future business and financial plans for the company from 2010 onward," said Nassif.
The agency added that it could lower the ratings, potentially by more than one notch, if the company does not provide a clear and sustainable business plan to counteract the liquidity challenge and improve levels of free cash flow.
On the other hand the ratings could be revised to stable, or upgraded, if a sustainable and achievable revised business plan is brought forward or there is the potential for additional extraordinary government support, as a result, for example, of a strengthening of the company's link company to the emirate.