(MENAFN Press) 2 May 2012
Mangaf Sukuk Company BSC Ratings Action
Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed the rating of the USD38mn Sukuk, issued by Mangaf Sukuk Company (Mangaf) at 'BBB-', in view of the improved prospects of repayment of the Sukuk at maturity, coupled with the good security package. However, the Negative Outlook is maintained, reflecting the still unconfirmed status of the new financing needed to bridge the relatively modest repayment gap, the generally weak, real estate sector which may impede asset disposals, together with the overall, challenging operating environment in the region.
Mangaf Sukuk Company BSC is a special purpose vehicle company established for the issue of this Sukuk. This Sukuk issue is secured by the operating lease and assignment of revenue from the Mangaf Hilton. Rental payments and the final repayment due in 2012 are guaranteed by the parent, Kuwait Resorts Company KSC (KRC). At end 2010 and Q3 2011, the Mangaf Hilton and its rental revenue, continued to provide very high asset to value and Sukuk coupon payment coverage ratios. However, while coupon payments are being serviced in a timely manner from cash flows, the repayment of the principal Sukuk has been very much dependent on KRC.
Apart from Mangaf Hilton, KRC's other significant assets remain largely in the form of unquoted equities and land plots in the region. Impairment and revaluation losses on both these forms of investments were the main causes of the Company's net losses for the past two years and the consequent erosion of the equity base. This erosion in turn saw the already high leverage climbing further, despite a modest, but progressive, decline in total debt. While improved at end September 2011, leverage nonetheless remained above the maximum leverage covenant of the Sukuk under review. With the Sukuk maturing in three months' time (July), debt repayment has become more of a priority for investors, than this breach of covenant.
KRC's recurring income and cash flow remained largely confined to the Mangaf Hilton. Although the more than satisfactory occupancy rate at the hotel adequately supports the Sukuk coupon payments, as well as the Company's entire funding and operating costs, this rental income is modest in monetary terms. Consequently, there is a considerable reliance on asset sales and/or refinancing to meet debt repayments. Given the weak, real estate market in the region, the dependence on asset sales does give rise to concerns. That said, the Company has successfully exited some investments in Q3 and also appears to have an orderly disposal plan in hand. Nonetheless, latest cash flow projections show some shortfall with regard to the repayment of the Sukuk, at maturity. Timely repayment of the Sukuk will therefore need additional financing sources. In this respect, the Company is in the process of securing a new facility to cover this shortfall - the balance of the outstanding Sukuk repayment is to be funded from internal resources and a firm, asset sale is already in the pipeline. A further, positive factor is that at the end of the first week of March, cash balances had also risen appreciably. Together, these factors have significantly improved the prospects for the full and timely repayment of the Sukuk at maturity.
Tel: 357 25 342300
Senior Credit Analyst
Rating Committee Chairman
Senior Credit Analyst
The information sources used to prepare the credit ratings are the rated entity and public information. Capital Intelligence had access to the accounts and other relevant internal documents for the purpose of the rating, and considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. Capital Intelligence does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in May 2006. The ratings were last updated in September 2011.
The principal methodology used in determining the ratings is Bond Rating Methodology. The methodology and the meaning of each rating category and definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com.