Moody’s Investors Service has today upgraded the corporate family rating (CFR) and probability of default rating (PDR) of Aldar Properties PJSC (Aldar, or ‘the company’) by three notches to Ba1 and Ba1-PD from B1 and B1-PD respectively.
Concurrently, Moody’s has upgraded the $1.25 billion of bonds due 2014 issued by Atlantic Finance Limited and unconditionally guaranteed by Aldar by three notches, to Ba2 from B2. The outlook on all ratings is positive. This concludes the ratings review initiated on January 22, 2013 following the announcement that Aldar and Sorouh Properties PJSC would merge. Moody’s subsequently maintained the review after upgrading the CFR to B1 on July 1, 2013.
“We have upgraded Aldar’s ratings by three notches as a result of the company completing its merger with Sorouh. The merger was transformational in nature as it added material recurring rental income from residential properties and created the leading Abu Dhabi real estate player with a large land bank and a sizable investment property portfolio. There is increased visibility regarding the combined entity’s transactions with the government of Abu Dhabi, as well as in terms of its project pipeline and cash flow projections,” said Martin Kohlhase, Moody’s Senior Analyst and local market analyst for Aldar. “Aldar has a significantly improved risk profile as a result of increased visibility. Contracted transactions between the Abu Dhabi government and the company are planned to run until 2017, amounting to around AED9.1 billion, or $2.5 billion.”
The three-notch upgrade of Aldar’s rating reflects that, following the completion of the merger of Aldar and Sorouh in June 2013, there is now greater visibility regarding the combined entity’s transactions with the government of Abu Dhabi, as well as regarding its project pipeline and cash flow projections. In Moody’s view, contracted transactions until 2017 between the government and the company, worth approximately AED9.1 billion ($2.5 billion), materially de-risk Aldar. After netting for future government receipts, Aldar’s total debt is approximately AED5.1 billion ($1.4 billion). Furthermore, Moody’s expects Aldar’s development risk from third-party homebuilding activities to diminish and the net recurring rental cash flow (NRRCF) from its investment properties to grow to around AED745 million ($200 million) by the end of this year, which supports the company’s pro-forma debt load.
Moody’s considers Aldar’s current and future government project pipeline to be low risk, given the contracted expected cash inflows for the company and the government’s commitment to reimburse or pre-fund most, if not all, of these projects. In this context, the Government of Abu Dhabi’s credit risk is Aa2, which lowers Aldar’s risk exposure.
Furthermore, in Moody’s view, the growing NRRCF from Aldar’s investment property portfolio is less volatile and offers better cash flow visibility than the sale of real estate units, which have associated development risks and feature less in the company’s business mix compared to previous years. Although Aldar derives its NRRCF from a variety of real estate asset classes — residential, retail, office, hospitality and others — Moody’s notes that once Yas Mall, the company’s flagship investment property, is operational, approximately 25% of NRRCF will be generated by this one asset. Yas Mall is near completion, which reduces associated development risk for Aldar, and the handover of units to tenants for fit-outs has begun. Pre-leasing is at high levels ahead of the opening in 2014. Moody’s expects that, once Yas Mall, al rayyana and The Gate are fully occupied, Aldar’s NRRCF will double from 2013 levels by 2015.
Approximately AED12.6 billion ($3.4 billion) of Aldar’s various debt instruments (of a total of AED14.2 billion ($3.9 billion) per June end 2013) mature before the end of Q1 2015. However, Moody’s takes comfort from (1) the future cash inflow that the company will receive from its contracts with the government of Abu Dhabi, which total AED9.1 billion ($2.5 billion); (2) the fact that the vast majority of the company’s outstanding bank debt is with local relationship banks that are controlled by the government and have historically been supportive of Aldar; and (3) the expressed intention of banks to provide funding for the company’s refinancing (including the $1.25 billion (AED4.6 billion) of notes due in May 2014) and business plan requirements.
The Ba1 rating benefits from one notch of uplift as a result of shareholder support. Mubadala Development Company PJSC (Mubadala; Aa3 stable) owns 30.5% of Aldar’s capital. Mubadala, an agent of the government of Abu Dhabi, has to date provided substantial financial support to Aldar. Moody’s expects the government of Abu Dhabi, as well as Mubadala, to use Aldar as a preferred vehicle for large infrastructure projects in the Emirate of Abu Dhabi.
The rating remains currently constrained for the following two reasons: (1) Aldar’s project pipeline still carries a degree of market risk linked to units that will be sold to third parties; and (2) Yas Mall will need to establish a track record of at least two quarters before a further upgrade could occur.
Moody’s has maintained a one-notch differential between the bonds and the CFR to reflect the subordinated position of unsecured noteholders as the majority of Aldar’s debt is secured against land and government receivables.
RATIONALE FOR POSITIVE OUTLOOK
The positive rating outlook reflects the potential for the rating to be upgraded if Aldar demonstrates that it can achieve AED1.5 billion (approximately $400 million) of NRRCF by 2015.
WHAT WOULD CHANGE THE RATING UP/DOWN
Moody’s could upgrade the ratings if, combined with maintaining financial debt in the range of AED5-6 billion ($1.4 billion to $1.6 billion), Aldar is able to (1) further reduce its market risk; (2) refinance maturing debt instruments and extend its debt maturity profile, which is currently geared towards the short term; and (3) open Yas Mall and other projects under development, which in aggregate with the existing IPs will generate AED1.5 billion (around $400 million) of NRRCF per annum. Furthermore, a rating upgrade would be dependent on Aldar maintaining net debt/EBITDA leverage of below 3.0x on a sustainable basis and fixed charge cover (EBITDA/(interest expense + capitalized interest + preferred dividends)) of above 4.0x.
Conversely, Moody’s could downgrade the ratings if Aldar does not achieve the following thresholds: AED1.5 billion (around $400 million) of NRRCF by 2015; net debt/EBITDA of below 4.5x; and fixed charge cover of above 3.0x. The ratings could also come under downward pressure if Aldar’s non-government-related development pipeline increases such that if the company’s debt levels grow, its risk profile is increased.
The principal methodology used in these ratings was the Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010 and Global Homebuilding Industry published in March 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Aldar Properties PJSC is one of the largest property developers in the Emirate of Abu Dhabi, the largest of seven emirates that form the United Arab Emirates. Aldar had revenues of AED2.9 billion ($790 million) for the six months ending June 2013 and a net profit of AED1.4 billion ($381 million) over this period.
The Local Market analyst for this rating is Martin Kohlhase, 9184.108.40.20644.
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