Qatari Real Estate Co. Ezdan Holding Cut To #B# On Weak P On CreditWatch Negative On Risk Of Covenant Breach

Stocks and Financial Services Press Releases Wednesday May 16, 2018 17:49
DUBAI--16 May--S&P Global Ratings
DUBAI (S&P Global Ratings) May 16, 2018--S&P Global Ratings said today that it had lowered its long-term issuer credit rating on Qatari real estate company Ezdan Holding Group Q.S.C. to 'B' from 'BB-'.
At the same time, we lowered our issue rating on Ezdan's two senior unsecured sukuk of $500 million each to 'B-' from 'B+'.
We placed all the ratings on CreditWatch with negative implications.

The downgrade and the CreditWatch placement reflect that Ezdan's earnings are weaker and more volatile than we expect for a real estate company as a result of certain neighboring countries' blockade of Qatar. This creates a high risk of covenant breaches and potentially debt acceleration on the company's sukuk and key bank loans, in our view. Potential renegotiation of the instruments will likely lead to higher interest costs, putting further pressure on Ezdan's interest cover ratio, which was 1.4x as of Dec. 31, 2017, and may decline to about 1.3x in 2018-2019.

A group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen, moved to cut diplomatic ties, as well as trade and transport links, with Qatar in June 2017. Since the blockade, Ezdan's residential and retail assets have been facing difficulty performing up to potential, with residential and commercial unit occupancy falling to 80% in March 2018 from 92% in December 2016. In 2017, Ezdan delivered new assets, including 1,800 residential units in Ezdan Oasis, two malls, and one hotel. These assets have struggled to ramp up performance, and their efforts have resulted only in minimal occupancy and negligible EBTIDA generation.

During the first quarter of 2018, Ezdan generated only Qatari riyal (QAR) 208 million (about $57 million) in EBITDA, excluding dividends from equity investments. The key weakness is Ezdan's concentration in Qatar's residential property market with a focus on villa-compounds. This segment of the market remains challenging, and rental income declined in 2017 and year-to-date 2018, according to DTZ Qatar. We believe the ongoing blockade may continue to depress rental levels and occupancy. We have therefore revised down our assessment of Ezdan's business risk profile to fair from satisfactory.

Ezdan's weakening ability to generate EBITDA puts it at risk of a covenant breach. Covenants at risk include a maximum net debt to EBITDA of 8.0x under the sukuk due in 2022 and a minimum debt service coverage of 1.1x under one syndicated loan (1.0x under two other syndicated loans). We understand that the company has already signed a QAR3 billion loan with Commercial Bank of Qatar in first-quarter 2018 to extend maturities and improve covenant headroom and is in process of refinancing part of its syndicated loans to improve these further. We think covenant headroom may remain tight also under the new facilities, as Qatar's market conditions have changed significantly since the blockade and interest costs are likely to rise.

Additionally, Ezdan generated QAR200 million in dividend income from equity investments in the first quarter of 2018, the level of which is uncertain going forward. Weaker performance of Qatari stock market could possibly result in lower dividend income in the future. As a result, we expect Ezdan's EBITDA interest coverage will remain very close to 1.3x, which is at the weaker end of our aggressive financial risk category. We therefore apply a negative comparable ratings adjustment to the rating.

The CreditWatch reflects the risk of further downgrades over the next three months if the company suffers covenant breaches that are not properly managed and result in debt acceleration.

We will affirm the rating if Ezdan is successful in reducing the risk of covenant breaches, for example by renegotiating covenants and therefore improving its liquidity. An affirmation will also require stabilization of the operating performance, with EBITDA interest coverage of more than 1.3x on a consistent basis.

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