RAM Ratings has downgraded from AA3(s) to A1(s) the rating of the RM1.0 billion Sukuk Wakalah (2013/2023) issued by

Published on 18 August 2016

RAM Ratings has downgraded from AA3(s) to A1(s) the rating of the RM1.0 billion Sukuk Wakalah (2013/2023) issued by Al Bayan Holding Company (Al Bayan or the Group) through its special-purpose vehicle, ABHC Sukuk Berhad (ABHC). The downgrade is premised on Al Bayan’s weaker liquidity position and cashflow protection metrics amid prevailing challenges within the construction sector of the Kingdom of Saudi Arabia. The outlook on the rating has been maintained at stable based on the Group’s financial profile which we anticipate will remain at a level supportive of ABHC’s A1(s) issue rating over the next 2-3 years.

We view Al Bayan’s liquidity as pressured, with short-term debts ballooning to SR1.49 billion as at end-December 2015 (end-December 2014: SR1.0 billion), mainly to fund heftier working capital requirements. Receivables collection from government projects was slower, given the Kingdom’s weaker finances. In March this year, the Group breached the minimum required balance in the Finance Service Reserve Account under the Sukuk Wakalah, although we understand the breach was due to a last-minute holdback of funds by a bank. The shortfall was subsequently rectified with funds from a syndicated loan. Nonetheless, we remain cautious of the construction sector facing a heightened risk of tight credit from financial institutions in view of Saudi Arabia’s weaker fiscal position as well as pervasive delays in progress payments and a general downtrend in the number of projects in the sector.

Al Bayan’s heavier-than-expected debt load of close to SR2 billion as at end-December 2015 resulted in funds from operations debt coverage (FFO) for FY Dec 2015 coming in below our benchmark for ABHC’s previous issue rating of AA3(s). High working capital requirements have also led to a substantial deficit in Al Bayan operating cashflow. Additionally, we expect the receivables collection period to lengthen further this year, leading to increased debt and continued deterioration of the Group’s FFO debt coverage ratio. Depending on the pace of improvement of government finances, Al Bayan expects its lengthy receivables collection period to gradually reduce from next year, easing debt-funded working capital needs.

Al Bayan’s credit profile is supported by its established businesses in Saudi Arabia and ongoing government-led infrastructure developments. We note the Group has a solid track record of securing and delivering on large government contracts. Coupled with the Kingdom’s continued commitment to developing key infrastructure, Al Bayan’s outstanding construction order book had grown to SR5.1 billion as at end-May 2016 (end-December 2014: SR4.5 billion).

Al Bayan’s gearing ratio of 0.91 times as at end-December 2015 and FFO debt coverage ratio of 0.24 times in FY Dec 2015 (FY Dec 2014: 0.96 and 0.26 times, respectively) are moderate and commensurate with the current issue rating. The Group’s debts are expected to continue to grow, albeit at a slower pace. As such, its gearing and FFO debt coverage ratios are anticipated to remain adequate over the next couple of years, although debt coverage could dip slightly this year.

Meanwhile, the Group’s credit profile is moderated by the substantial working capital requirements of its construction operations, which had resulted in a weaker liquidity profile. We also note that the rapid expansion of Al Bayan’s specialised construction business considerably heightens the Group’s exposure to execution risks. Furthermore, as revenues earned from contracts contribute about 80% of earnings, Al Bayan must constantly bid for new contracts to replenish its order book. These risks are partly mitigated by the relatively low degree of counterparty risk and the Group’s strong order book as at end-May 2016.

Al Bayan is a family-owned Saudi-based conglomerate with businesses mainly in the specialist construction of public infrastructure, and supply of a wide range of equipment, IT products and services, primarily servicing the Government of Saudi Arabia. Under a Kafalah agreement in favour of ABHC, the Group provides an irrevocable and unconditional guarantee to the holders of the sukuk. As such, the enhanced rating of the sukuk is based on the Group’s credit profile.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my