20/03/2012 18:05 AST
Capital Intelligence (CI), the international credit rating agency, today announced that it has downgraded the rating of the Housing Finance Company's (Iskan) KWD25mn unsecured bond to B- in view of the uncertainties regarding the repayment of the bond in less than five months' time.
This lower rating also reflects the jump in the already high leverage, the low revenue generation capacity, the weak quality of its loans and advances book (taking into consideration the reduction of this portfolio), together with the high assets and revenue concentrations. The existing 'Negative' Outlook is also maintained in view of the challenging operating environment, and the uncertainty as to any short-term recovery in revenues.
Almost half of the Company's asset base remained highly concentrated in the Khairan Pearl City project at end Q3 2011. Contributions to revenues from these investments continue to be mainly in the form of fair valuation gains. However, although the additional profits booked on actual sales are minimal, proceeds from these disposals are an important source of cash flow for the Company.
The quality of the Company's modest loan and advances remained weak, characterised by a high NPL ratio and extremely low provisioning coverage. Although NPLs have declined slightly in money terms, the ratio has remained very high, due to a contracting loans and advances book. The Company's loan loss reserve coverage remained one of the lowest in the industry. Whilst the unprovided NPLs are fully secured by collateral (largely properties), and the Company is in compliance with Central Bank of Kuwait's requirement on provisioning, CI remains of the opinion that this low coverage is neither prudent nor acceptable and that an already inadequate capital is very significantly impaired by these high, unprovided NPLs.
Following the liquidation of a subsidiary, Iskan's equity base saw a sharp contraction during the first nine months of 2011 and the consequent elimination of the related minority interests. This, in turn, caused the already high leverage to jump even higher, despite the fall in total liabilities. However, total debt has been significantly reduced over the past three years and the Company continues to demonstrate its timely ability to rollover/extend debt obligations, thus improving its debt maturity profile. This constitutes the main positive in the Company's current financial profile.
As a result of the weak income generation, there will be a continued reliance on asset sales not only to service debt but also to supplement operating cash flow. The Bond under review matures in July 2012. Management are actively pursuing a number of options which includes the further disposal of real estate assets and/or a further extension of the Bond, together with a new schedule for repayments over the extended period. Realistically attaining the former, however, raises concerns in view of the prevailing, weak real estate sector, together with the concentration of the Company's land holdings, in what remains a secondary location. CI is monitoring the Company's position closely and a further review/action may be taken following the forthcoming Bondholders' meeting.
Iskan was established in 2002 with the original core activities of providing housing finance to Kuwaiti clients. However, with the scaling back of this activity and the move towards other investment activities, Iskan's business model changed to that of an investment company in 2006. With most of its investments now in the real estate sector, the Company is today more of a real estate investment holding company.
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