Global Arab Network | Long-Term Rating on UAE-based National Central Cooling Lowered Due to Weak Liquidity

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Long-Term Rating on UAE-based National Central Cooling Lowered Due to Weak Liquidity

Global Arab Network - - Gamal Ragay

Thursday, 25 February 2010 17:55

Standard & Poor's Ratings Services said that it lowered its long-term corporate credit rating on United Arab Emirates-based district cooling company National Central Cooling Co. PJSC (Tabreed) to 'CCC+' from 'B+'. At the same time, S&P removed the rating from CreditWatch where it was placed with negative implications on Aug. 17, 2009. The outlook is negative.

In addition, the debt rating on the senior secured sukuk certificates due 2011 issued by Tabreed 06 Financing Corp. was also lowered to 'CCC+' from 'B+', and the debt rating on the subordinated convertible sukuk certificates due 2011 issued by Tabreed 08 Financing Corp. was lowered to 'CC' from 'CCC+'. At the same time S&P removed the ratings from CreditWatch where they were placed with negative implications on Aug. 17, 2009.

"The downgrade reflects the lowering of S&P assessment of Tabreed's stand-alone credit profile (SACP), which is now consistent with a rating in the 'CCC' category," said Standard & Poor's credit analyst Karim Nassif. "This lower stand-alone credit quality primarily reflects our view of Tabreed's weak liquidity, its significant refinancing risk over the short to medium term, and the absence of a permanent financing solution to improve liquidity and free cash flow generation."

S&P takes this view despite understanding that a 16.7%-owner of Tabreed, Mubadala Development Co. PJSC (Mubadala; AA/Stable/A-1+), itself an entity wholly owned by the government of Abu Dhabi, continues to have significant influence over Tabreed's finances and operations, which has included facilitating refinancings. Without this engagement from Mubadala, it is likely that Tabreed's SACP would be even weaker. That said, given S&P view of Tabreed's "important" role and what S&P perceives as the "limited" link with Mubadala and the Emirate of Abu Dhabi (AA/Stable/A-1+)--which S&P has revised from "strong"-- S&P will continue to review the near-term incentives for these latter entities to provide extraordinary support for Tabreed's liquidity and leverage.

The lowering of Tabreed's SACP also reflects S&P revised February 2010 base-case estimates for the full year 2010, compared with S&P December 2009 base-case estimates.

S&P also note Tabreed's exposure to medium-term refinancing risk. While Tabreed has thus far refinanced, it also appears exposed to its contractors' performance and financial position, which in turn could increase its weak liquidity position.

The 'CCC+' issuer credit rating on Tabreed is based on S&P opinion that, in accordance with S&P criteria for government-related entities (GREs), there is a "moderate" likelihood that the government of the Emirate of Abu Dhabi and/or its affiliates would provide timely and sufficient extraordinary support to Tabreed in the event of financial distress. S&P considers Tabreed's SACP to be in the 'CCC' category.

The "moderate" likelihood of extraordinary government support is based on S&P assessment of Tabreed's:

-- "Important" role in providing district cooling as part of Abu Dhabi's infrastructure strategy set out in the 'Abu Dhabi 2030' plan; and

-- "Limited" link with the Abu Dhabi government through its 16.7% ownership by Mubadala. S&P considers that Tabreed's link to the government and Mubadala has weakened over the past few months. This view is based on the delay by the Abu Dhabi government providing extraordinary financial support that would assist Tabreed with its negative free cash and liquidity challenges.

The negative outlook reflects S&P view of Tabreed's liquidity and negative free cash flow challenges. The outlook also reflects S&P view of Tabreed's ability to implement a financial plan before its current obligations come up for refinancing in the next half year. S&P will continue to monitor Tabreed's record in obtaining additional financing and refinancing its current debt. Its performance in dealing with these issues could lead to further rating actions.

Global Arab Network

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