Fitch Ratings-Dubai/London-24 July 2014: Fitch Ratings has affirmed Qatar Real Estate Investment Company P.J.S.C.’s (Alaqaria) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB+’, and Short-term IDR at ‘F2′. The Outlook on the Long-term IDR is Stable.
Key Rating Drivers
Strong Business Model
The ratings reflect Alaqaria’s strong business model, robust lessor profile and above-average lease duration for the region. Finance leases provide stable, long-term rental income, which are underpinned by off-take arrangements with Qatar Petroleum (QP) and government-related entities (typically 10-15 years’ duration), and operational lease agreements of between five and 25 years with QP-related companies. However, Alaqaria’s size and concentration risks limit the standalone rating to its current level.
Low Counterparty Risk
The ratings also reflect Alaqaria’s low counterparty risk, as most of its projected income is due to come from strong credits, plus the benefits of a guaranteed rate of return on its contracts with QP or QP-related entities. These arrangements have provided Alaqaria with sound defensive qualities during the region’s property downturn. Fitch notes that the majority of income is generated from QP, the government-owned national oil company, which benefits from a predetermined internal rate of return. The majority of Alaqaria’s rental and lease income in 2013 continued to be from QP, the government, and QP-related companies.
Relationship With State-Related Entities
Under Fitch’s parent and subsidiary methodology, Alaqaria’s ‘BBB+’ rating benefits from a two-notch uplift from its standalone rating of ‘BBB-‘. This reflects the company’s strategic and operational relationship with state-related entities as a leading developer of long-term rental housing projects for both the state and corporate sectors in Qatar. Any change in government-implied support, or government ownership of Alaqaria could have negative rating implications.
Improving Financial Profile
Alaqaria’s capitalisation and leverage metrics have improved considerably in the past two years, supporting the current rating. We expect Alaqaria to maintain an EBIT net interest cost cover over 5x in our forecast period and maintain FFO net leverage around 4x.Fitch notes that as Alaqaira’s new projects in the pipeline materialise there will be a modest increase in leverage. However, the metrics will still be in line with the ratings.
The ratings could be downgraded if there is a loss of preferential status with the state or with QP, EBITDA margins are sustainably below 80%, a downturn which leads to significantly lower net interest cover or a substantial increase in leverage; or credit deterioration at the sovereign or QP.
The ratings could be upgraded if the company received formal support from the State of Qatar.
Liquidity & Debt Structure
The company had a cash position of QAR431m as at June 2014 (QAR201m as at FYE12). Alaqaria has no short-term refinancing risk until 2016, when the bilateral borrowings are due.In August 2012, Alaqaria’s USD300m Sukuk bonds were redeemed on the back of the company’s improved liquidity and obtaining a related party loan. Fitch believes that any liquidity risk that could emerge will be mitigated by Alaqaria’s continued access to bank financing and government support if needed.