Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has revised the rating on the Oman National Scale of the Sukuk issued by Golden Group LLC to ‘omA+’ from ‘omBBB+’.
The Outlook on the ratings is ‘Stable’. The change in the Sukuk rating reflects the recalibration of the National Rating Scale for Oman, as well as the repositioning of entities and issues rated on that scale, following the recent downgrade of Oman’s sovereign ratings.
National Scale Ratings provide a measure of relative creditworthiness within a country and are derived in part from international ratings using country-specific maps. The sovereign’s international ratings serve as the reference point for national ratings in Oman and due to the lowering of the sovereign’s ratings some international scale grades now correspond to higher grades on the national scale than they did previously. The upward movement in the national rating should not, therefore, be interpreted as indicating an improvement in fundamental creditworthiness. Indeed, weakened prospects for the operating environment and a softer real estate market may possibly adversely impact the Value of the Sukuk assets and could also impact the Guarantor’s financial metrics going forward.
The main two supporting factors for this rating are first a security package which provides 100 per cent coverage of the Sukuk issue amount and second a negative pledge on other real estate assets covering a further 20 per cent of issue value. This is designed to ensure that there are sufficient unencumbered assets available to make up for any valuation shortfalls in the security package asset valuation during the life of the Sukuk, as well as providing a secondary source of repayment at maturity. As a further support, the issue has the benefit of the personal guarantee of Sheikh Salim Bin Ahmed Al Ghazali.
The security package comprises the properties that make up the Sukuk assets. All are mortgaged by the guarantor in favour of the Security Agent for the issue. The guarantee from the Sheikh is supported by detailed net worth, income and cash flow statements. Golden Sukuk LLC, the rated entity, is a special purpose vehicle set up for the issue of the Sukuk. The initial Sukuk assets comprised 25 real estate properties all located in Oman which are diversified by property types. There is, however, some concentration with regards to individual holdings. Current coverage of the initial tranche of the Sukuk meets the full coverage requirement but with no excess. Valuations will be carried out at least annually by independent valuers. Compliance with the 100 per cent coverage ratio is being monitored by the security agent.
Although Golden Group Holding LLC, the obligor, itself is a fairly recent creation in corporate terms and is thus not considered to be a significant source of support, the various operations that make up the wider Group are well established and have been in operation since the 1970s. In fact, the obligor has no other assets or income except for capital at this stage. The proposed hotel projects are expected to be completed in 2020 and will therefore begin to contribute revenues toward repayment from that point onwards, during the last two years of the Sukuk. Consequently, any required top up of Sukuk assets, funds for profit payment, and funds for eventual repayment to Sukukholders is to a significant extent reliant on the guarantor. At present, however, the intention remains to refinance the remaining amount of Sukuk principle at maturity.
With the recent softening of the real estate market in a more difficult operating environment, there is a higher possibility of a need to top up Sukuk assets, and in this respect the guarantor has adequate unencumbered assets to meet this requirement in the form of additional real estate properties equivalent to 20 per cent of the issue. These are covered by a negative pledge against future encumbrance. As part of the proceeds of the Sukuk is being used to prepay certain borrowings of the guarantor, the already sound liquidity position of the guarantor should therefore improve as some of the currently encumbered assets are accordingly being released. As a result, the projected savings from the pre-payment of previous borrowings are expected to be in excess of the amounts needed for profit payment on the Sukuk, further improving the cash outflow position of the guarantor. An amount equivalent to the first year of profit payments on the Sukuk has held back from the Sukuk proceeds to fund the first two profit payments, but this arrangement will lapse once these payments have been made.
The financial capacity of the guarantor therefore remains a major consideration for the initial rating of the Sukuk. In this regard, adequate information was provided to CI Ratings. CI is of the opinion that the guarantor is in a sound position to meet his obligations towards this Sukuk.
The main constraints on the rating relate to various uncertainties. These include the execution of the three hotel projects which are being part-financed by the issue in terms of possible cost overruns or construction delays (although buffers have been built into the budgets for excess costs). It is also noted the Sukuk will provide only half of total project costs and consequently there is the question of the funding ability of the other partners of the three projects. The second uncertainty relates to repayment risk. The Sukuk cash flow forecasts indicate limited capacity for repayment at maturity and consequently there is a reliance on refinancing and/or asset sales by the guarantor. The combination of the Sukuk assets and the additional assets covered by the negative pledge on encumbrance is designed to ensure that there are sufficient assets available for sale should refinance not be possible.
The third uncertainty relates to economic conditions in Oman going forward. The economy remains under some pressure at present and this could further impact real estate prices and rental levels as well as (when the projects are complete) hotel occupancy and room rates. Any of these latter factors could in turn impact the income and cash flows of the Sukuk and ultimately the guarantor. That said, hotel income projections are fairly modest, being the first few years of operations, and are modest in relation to the overall revenue of the guarantor. Moreover, Oman currently still has a shortage of quality hotel rooms below the five-star level and room demand is therefore likely to hold up well given the emphasis on growing tourism revenues.