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Qatar Real Estate Investment Company: Rating of $300m Alaqaria Sukuk affirmed

Global Arab Network - - George Haddad

Thursday, 15 April 2010 22:06

Fitch Ratings has today affirmed Qatar Real Estate Investment Company Q.S.C.'s (Alaqaria) Long-term Issuer Default rating (IDR) and senior unsecured rating at 'BBB+', and its Short-term IDR at 'F2'. The IDR and senior unsecured were removed from Rating Watch Positive (RWP). The Outlook is Stable.

The senior unsecured rating of Qatar Alaqaria Sukuk Company (QREIC)'s USD300m Sukuk bonds (due 2012) has also been affirmed at 'BBB+', and removed from RWP.

Fitch resolved the RWP upon receiving clarification regarding final terms and conditions of Barwa Real Estate Company Q.S.C (Barwa) tender offer for the acquisition of the entire share capital of Alaqaria. The acquisition would have no immediate impact on Alaqaria's credit profile as there would be no major change in business strategy or financial profile.
Alaqaria will become a subsidiary of Barwa. However, it will remain a separate legal entity. Fitch also notes that this transaction will not result in a requirement to prepay Alaqaria/QREIC debt facilities (including the USD300m outstanding trust certificates) as confirmed by Alaqaria senior management. Fitch also does not expect Barwa to extract cash from Alaqaria in a way that will have a material impact on Alaqaria credit profile. Alaqaria's Board of Directors will have a new member representing Barwa, while management and operations are expected to remain unchanged. Qatari Diar, the property investment arm of the country's sovereign wealth fund, will keep its 45% equity holding in the combined group.

Fitch dose not currently factor in any additional credit benefit of the acquisition that could in the future improve Alaqaria's access to support, that may provide Alaqaria with greater financing flexibility, through equity-raising, parent loans, and other forms of support in time of need.

The ratings continue to reflect Alaqaria's strong business model driven by a robust lessor profile, and above-average lease duration for the region. Finance leases provide stable, long-term rental income which are underpinned by offtake arrangements with Qatar Petroleum (QP) and government-related entities (of typically between 10 and 15 years' duration), and operational lease agreements with QP-related companies that are between five and 25 years. However, despite these benefits, Fitch notes that with most of its contracts relating to QP, Alaqaria faces a high level of customer concentration.

Under Fitch's Parent and Subsidiary methodology, Alaqaria's 'BBB+' benefits from a two-notch uplift from its stand-alone rating of 'BBB-' to reflect the strategic and operational relationship with state-related entities as a leading developer of long-term rental housing projects for both state and corporate entities in the State of Qatar. Its ratings also take into account the state representation on the company's board. Alaqaria's close business ties with state-owned QP and the importance of QP's projects and thus Alaqaria's activities to the State of Qatar have also been considered for the rating.

Alaqaria's ratings continue to be constrained by its under-capitalised balance sheet, high leverage (LTV) of 65%, and moderately low interest cover (Fitch-adjusted EBITDA interest cover ratio (net interest cover) was 2.5x at FYE09)) - especially for the large projects it has under construction - and a forward order book that is expected to be funded by additional borrowings. Liquidity will also continue to be limited by negative forecast free cash flow. Nevertheless, this risk should be mitigated by Alaqaria's continued access to local bank financing.

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