Moody's reviews QREIC for possible downgrade
Moody's said it has placed the A2 local and foreign currency issuer ratings for Qatar Real Estate Investment Company (QREIC or Alaqaria) and the A2 rating for the $300 million Trust Certificates (Sukuk) due 2012 issued by Qatar Alaqaria Sukuk Company (QASC) under review for a possible downgrade following the company's announcement that the Qatari government has issued a directive to merge QREIC with Barwa Real Estate Company.
"Given limited information provision at this stage, Moody's said its review will focus on the impact the merger will have on the business and financial risk profile as well as any changes in the government ownership and implicit support assumptions that currently underpin QREIC's A2 ratings," said Martin Kohlhase, a DIFC-based Assistant Vice President and lead analyst for QREIC.
He added that "QREIC's stand-alone rating is susceptible to a potential downgrade as it is currently weakly positioned because of a highly-levered capital structure in a weakening macroeconomic environment."
Moody’s said the ratings have been placed under review for potential downgrade as QREIC's Baseline Credit Assessment (BCA), or standalone rating, of 8-10 (Baa-range) is weakly positioned because of high financial leverage (Debt/EBITDA of 8.9 times per 31 December 2007) and low interest coverage (EBIT/Interest expense of 1.9x) and has to be reviewed in the context of the credit metrics, the evolving capital structure and new financial policy of the combined entity.
QREIC's current BCA factors in the low-risk nature of its business model stemming from long-term rental income from government related entities, which Moody's will evaluate should it become diluted following the merger with Barwa. This could lead to a downgrade of the BCA as it results from a departure of one of Moody's fundamental assumptions—Moody's views QREIC as an ancillary service provider to the government—upon assigning the BCA.
Qatari Diar, an entity that is 100 per cent-owned by the government of Qatar, holds substantial stakes in both QREIC (27 per cent) and Barwa (45 per cent). The review will encompass the new shareholder structure and the implicit support that is currently factored into QREIC's ratings.
A potentially larger share of the government in the new company would likely be offset by a riskier business profile given QREIC's close relationship with government-owned Qatar Petroleum (rated Aa2), from which the company derives a large share of its income today. Moody's said it will also assess the new ownership and the board composition of QREIC in view of early redemption clauses that could be triggered for the $300 million Sukuk and the provisions QREIC puts in place for such an event.
Moody's rates QREIC in accordance with its "The Application of Joint Default Analysis to Government Related Issuers", published in April 2005. Other methodologies and factors that may have been considered in the process of rating QREIC can also be found in the Credit Policy & Methodologies directory. Moody's last rating action on QREIC was on July 25, 2007, when the rating agency affirmed the A2 issuer ratings and the (P)A2 bond ratings following Moody's upgrade of the sovereign ratings to Aa2.
Qatar Real Estate Investment Company (also known as Alaqaria), headquartered in Doha/Qatar, provides housing and related facilities in industrial cities under long term contracts to Qatar's growing hydrocarbon sector. Alaqaria is 27 per cent directly owned by Qatari Diar, with the remainder listed on the Doha Securities Market.