Global Arab Network | Fitch Downgrades Gulf General Investment Company to 'BB'

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Fitch Downgrades Gulf General Investment Company to 'BB'

Global Arab Network - - Adam Turner

Saturday, 18 April 2009 01:40

Fitch Ratings has today downgraded Dubai-based Gulf General Investment Company's (GGICO) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BB' from 'BB+', respectively. All ratings remain on Rating Watch Negative (RWN). The downgrade reflects increased concerns about GGICO's significant exposure to the United Arab Emirates' stock market through its large investment securities portfolio, and its ability to fully manage the risks within this portfolio. The downgrade follows a recent detailed assessment of GGICO's securities trading operations by Fitch, as previously outlined in a 26 March 2009 Rating Action Commentary, entitled 'Fitch Downgrades Gulf General Investment Company to 'BB+'; Maintains Negative Watch', available on the agency's public website, www.fitchratings.com.

GGICO's investment portfolio constituted a substantial 24% of total assets at end-2008. Fitch notes that GGICO limited its trading losses to 15% of the total portfolio value in 2008, when the Abu Dhabi Securities Exchange (ADX) lost 47% and the Dubai Financial Market (DFM) lost 72% in the same period. According to management guidance, GGICO's investment portfolio is overweight to the ADX. However, the agency is concerned about the current use of relatively unsophisticated risk management systems and low levels of transparency. In 2008, fair value losses on held for trading investments were AED292m and impairment losses on available for sale investments were AED109m. Fitch believes that further losses in 2009 are possible, which would put additional pressure on GGICO's liquidity, key credit metrics and covenant headroom. Covenant headroom is particularly tight, as illustrated by the fact that a loss of just 5-10% within the securities portfolio could lead to a breach of interest coverage covenants.

Fitch treats GGICO's securities portfolio as a source of semi-liquid funds. However, in light of concerns over risk management, the agency will now treat only 25% of the value of this portfolio as cash within its Fitch adjusted credit ratios and liquidity analysis (previously 50%). In assessing GGICO's credit profile, Fitch, in line with its previous approach, continues to assume zero contribution from the securities division in terms of profit, although profits and losses from this division are considered by GGICO's banks in its covenant calculations and therefore have some relevance for its rating. Liquidity in 2009 could also deteriorate due to weaker operational cash flows, more restricted access to external financing, further losses in the securities portfolio and potential covenant problems. At end-2008, GGICO's financial position was in line with its current ratings, with Fitch adjusted net leverage of 3.8x based on 25% of the value of securities portfolio being considered as cash (compared to 2.4x in FY07, which was based on 50% of the value of securities portfolio). Fitch adjusted net interest coverage was 6.5x at end-2008, while GGICO's liquidity score was less than one (sources of liquidity/uses of liquidity over the next 12 months) as of FYE08. The agency forecasts that these ratios will deteriorate in 2009 and 2010.

To help improve liquidity and provide greater covenant headroom, GGICO is undertaking a number of measures: not paying a cash dividend for 2008; mothballing all uncommitted residential construction projects (expected expenditure during 2009 and 2010 will only be against committed projects, which are already 95-100% pre-sold); negotiating a new USD200m (AED734m) bank facility; and issuing a AED500m mandatory convertible bond (effectively a rights issue). Fitch notes the willingness of GGICO's majority owners, the Al Sari family, to participate in the mandatory convertible bond issuance, which provides some confidence that GGICO will be able to obtain the expected funds, and in turn provides some support at the current rating level. However, GGICO continues to be rated as a stand alone entity, with no rating uplift being awarded for the linkage with its majority owners.

The ratings remain on RWN, reflecting concerns that if the deterioration in market conditions accelerates, this would weaken GGICO's operational performance, leading to reduced liquidity and interest cover, increased leverage and a risk of a covenant breach as early as December 2009, given the already tight headroom.

Resolution of the RWN will be based on (i) GGICO successfully issuing the AED500m mandatory convertible bond and obtaining the USD200m banking facility and (ii) adequate performance in Q209 to Q409 confirming GGICO's ongoing ability to generate cash flow, retain liquidity and avoid a potential covenant breach at the December 2009 test date. Fitch expects to resolve the RWN by end-2009.

Global Arab Network

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