Global Arab Network | Moody's downgrades Dubai-based Gulf General Investment Company to Ba3

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Moody's downgrades Dubai-based Gulf General Investment Company to Ba3

Global Arab Network - - Rabih Serrai

Wednesday, 19 May 2010 11:41

dubai_Gulf_General_Investment_Company_GGICO

Moody's Investors Service has today downgraded to Ba3 from Ba1 and subsequently withdrawn the long-term foreign and local currency issuer ratings of GGICO and, at the same time, assigned a corporate family rating (CFR) and probability of default rating (PDR) of Ba3 to Gulf General Investment Company (GGICO). The outlook is negative.

The assignment of the CFR is in line with the rating agency's practice for non-investment grade rated issuers.

The rating action was prompted by a deterioration in GGICO's profitability that has resulted in the company failing to meet Moody's financial-parameter assumptions for the Ba1 rating. The rating action also reflects Moody's belief that, in the short to medium term, GGICO's financial leverage will remain above the rating agency's previous expectations.

"Moody's acknowledges GGICO's efforts in improving its financial profile following the issuance of an AED500 million zero-coupon mandatory convertible bond in 2009," says Raffaele Semonella, lead analyst for GGICO at Moody's. "However, Moody's notes that the company's profitability was negatively affected by a weaker operational performance at some of its core subsidiaries," continues Mr Semonella, "as well as significant fair-value losses on its investment securities portfolio, which resulted in higher-than-expected leverage in 2009." Moody's highlights that although GGICO's investment securities portfolio is supportive of the company's liquidity profile, it also introduces further earnings volatility, as witnessed by fair-value losses of AED140 million (USD38 million) in 2009. At year-end 2009, the total value of GGICO's investment securities portfolio was AED1.4 billion (USD380 million).

GGICO's maturity profile includes AED1.8 billion (USD0.49 billion) of short-term debt, which represents around 53% of the company's total debt (33% perpetual short-term and 20% maturing short-term) and includes a large amount of perpetual rollover facilities with local and international banks. In Moody's view, this exposes the company to permanent refinancing risk, although the rating agency takes comfort from GGICO's long-term bank relationships and its good track record in extending facilities as they fall due.

GGICO continues to generate the majority of its operating income from real estate development activities, which expose the company to the challenging operating environment in the Dubai real estate market.

Although Moody's expects contribution from real estate activities to reduce over time as GGICO completes its projects, real estate earnings, which also include a growing rental income component, are likely to remain significant, in the rating agency's view.

"The outlook on GGICO's rating is negative, reflecting Moody's ongoing concerns regarding the company's liquidity profile, which remains reliant on the company's ability to roll over its short-term facilities," adds Mr Semonella. Furthermore, although Moody's does not anticipate a covenant breach, the rating agency notes that GGICO could come under pressure from some of the financial covenants under one of its syndicated facilities if the company fails to perform in accordance with its currently conservative planning assumptions. The Ba3 rating therefore assumes, among other things, that FFO/Net Debt will trend toward the mid-teens over the course of 2010 and then improve further toward the high teens by the end of 2011.

Moody's last rating action on GGICO was on 16 April 2009, when the rating agency downgraded the ratings to Ba1 with a stable outlook from Baa2.

GGICO was incorporated in 1973 and is today headquartered in Dubai and listed on the Dubai Financial Market. At year-end 2009, the company had AED197 million (USD54 million) in net profit.

Global Arab Network

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