By Gavin Davids
Concerns over high government support levels being affected prompts ratings drop.
Following Qatar Real Estate Investment Company’s (Alaqaria) announcement that it would become a fully owned subsidiary of Barwa Real Estate Company, Moody’s announced on Wednesday that it has downgraded Alaqaria’s ratings to Baa1 from A2.
In addition, the financial research company downgraded the $300 million Trust Certificates issued by Qatar Alaqaria Sukuk Company to Baa1 as well. However, the ratings for both will be kept on hold till the transaction closes, following which, they will be subject to further review.
On Sunday, the two companies had announced that they had agreed the initial terms of their merger, subject to Alaqaria’s acceptance of the tender offer for its shares.
Under the proposal, Qatar Diar, which currently holds a 27 percent stake in Alaqaria, and a 45 percent stake in Barwa, will retain its stake in Barwa, while indirectly upping its stake in Alaqaria to 45 percent as well.
Moody’s said that it understands that the takeover will not trigger a ‘change of control’ clause of the sukuk, as minimum ownership levels and board composition would remain unchanged.
The Doha based Alaqaria provides housing and related facilities in industrial cities to Qatar’s growing hydrocarbon sector. Its earnings are predominately generated by long term rental contracts with government and quasi government tenants.
The proposed change in ownership, which means Barwa will become the new direct majority shareholder of Alaqaria, creating the ninth largest company on the Qatari bourse, with a market capitalisation of $3.05 billion.
However, the ownership will impact the high support levels that Moody’s had incorporated into Alaqaria’s ratings as it becomes further removed from government support.
Although the government retains a 45% direct stake in Barwa, in Moody’s opinion, support mechanisms to Barwa and ultimately, Alaqaria might not be extended in the same way. It is because of this Moody’s has taken its ratings down two notches.
As part of their review, Moody’s will assess the status of Alaqaria as a government related issuer in addition to its baseline credit assessment.
Its Baa1 assessment will also take into account the company’s importance to the economy of Qatar and its strategic importance as a service provider to the nation’s hydrocarbon industry.
The review will also focus on its standalone credit profile including the operating performance, expansion plans, future funding requirements and the funding mix, as well as how recurring cash flow match the debt maturities.