RAM Ratings downgrades Saudi-based Al Bayan's Sukuk Rating

Transcription

1. 8 /18/2016 Latest Announcement - (News ID : 2016081800036) Latest Announcement Subject : ABHC Sukuk Berhad News ID : 2016081800036 ABHC Sukuk Berhad Organisation Name: RAM RATING SERVICES BERHAD News Type: RATING ANNOUNCEMENT Reference Site: None Embargo Date: 18/08/2016 Embargo Time: 05:11 PM Expiry Date: 17/09/2016 Priority: Medium Summary: RAM Ratings downgrades Saudi-based Al Bayan's sukuk rating Attachments: No attachment available. Disclaimer: The user, including a user who is also a FAST Participant, expressly agrees that the use of this website which is accessible at https://fast.bnm.gov.my/ is at the user's sole risk. The information contained in this FAST website is compiled by MyClear Sdn. Bhd. (MyClear) and is provided on an "as is" basis without any representations or warranties of any kind, either expressed or implied. 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Content RAM Ratings has downgraded from AA3(s) to A1(s) the rating of the RM1.0 billion Sukuk Wakalah (2013/2023) issued by Al Bayan Holding Company (Al  Bayan or the Group) through its special­purpose vehicle, ABHC Sukuk Berhad (ABHC). The downgrade is premised on Al Bayan's weaker liquidity position  and cashflow protection metrics amid prevailing challenges within the construction sector of the Kingdom of Saudi Arabia. The outlook on the rating  has been maintained at stable based on the Group's financial profile which we anticipate will remain at a level supportive of ABHC's A1(s) issue  rating over the next 2­3 years. We view Al Bayan's liquidity as pressured, with short­term debts ballooning to SR1.49 billion as at end­December 2015 (end­December 2014: SR1.0  billion), mainly to fund heftier working capital requirements. Receivables collection from government projects was slower, given the Kingdom's weaker  finances. In March this year, the Group breached the minimum required balance in the Finance Service Reserve Account under the Sukuk Wakalah,  although we understand the breach was due to a last­minute holdback of funds by a bank. The shortfall was subsequently rectified with funds from a  syndicated loan. Nonetheless, we remain cautious of the construction sector facing a heightened risk of tight credit from financial institutions in  view of Saudi Arabia's weaker fiscal position as well as pervasive delays in progress payments and a general downtrend in the number of projects in  the sector. Al Bayan's heavier­than­expected debt load of close to SR2 billion as at end­December 2015 resulted in funds from operations debt coverage (FFO) for  FY Dec 2015 coming in below our benchmark for ABHC's previous issue rating of AA3(s). High working capital requirements have also led to a  substantial deficit in Al Bayan operating cashflow. Additionally, we expect the receivables collection period to lengthen further this year, leading  to increased debt and continued deterioration of the Group's FFO debt coverage ratio. Depending on the pace of improvement of government finances, Al  Bayan expects its lengthy receivables collection period to gradually reduce from next year, easing debt­funded working capital needs. Al Bayan's credit profile is supported by its established businesses in Saudi Arabia and ongoing government­led infrastructure developments. We note  the Group has a solid track record of securing and delivering on large government contracts. Coupled with the Kingdom's continued commitment to  developing key infrastructure, Al Bayan's outstanding construction order book had grown to SR5.1 billion as at end­May 2016 (end­December 2014: SR4.5  billion).  Al Bayan's gearing ratio of 0.91 times as at end­December 2015 and FFO debt coverage ratio of 0.24 times in FY Dec 2015 (FY Dec 2014: 0.96 and 0.26  times, respectively) are moderate and commensurate with the current issue rating. The Group's debts are expected to continue to grow, albeit at a  slower pace. As such, its gearing and FFO debt coverage ratios are anticipated to remain adequate over the next couple of years, although debt  coverage could dip slightly this year.  Meanwhile, the Group's credit profile is moderated by the substantial working capital requirements of its construction operations, which had resulted  in a weaker liquidity profile. We also note that the rapid expansion of Al Bayan's specialised construction business considerably heightens the  Group's exposure to execution risks. Furthermore, as revenues earned from contracts contribute about 80% of earnings, Al Bayan must constantly bid  for new contracts to replenish its order book. These risks are partly mitigated by the relatively low degree of counterparty risk and the Group's  strong order book as at end­May 2016. Al Bayan is a family­owned Saudi­based conglomerate with businesses mainly in the specialist construction of public infrastructure, and supply of a  wide range of equipment, IT products and services, primarily servicing the Government of Saudi Arabia. Under a Kafalah agreement in favour of ABHC,  the Group provides an irrevocable and unconditional guarantee to the holders of the sukuk. As such, the enhanced rating of the sukuk is based on the  Group's credit profile. Media contact Ben Inn (603) 7628 1024 ben@ram.com.my The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security's market price or its  suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and  enforceability of financial obligations. RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third  parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no  influence on RAM Ratings' credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity,  integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings  reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. Similarly, the disclaimers above also apply to RAM Ratings' credit­related analyses and commentaries, where relevant. Published by RAM Rating Services Berhad © Copyright 2016 by RAM Rating Services Berhad https://fast.bnm.gov.my/fastweb/public/PublicInfoServlet.do?chkBox=2016081800036&mode=DISPLAY&info=NEWS&screenId=PB010400 1/1