19/02/2011 00:00 AST
Capital Intelligence (CI), the international credit rating agency, announced that it has downgraded the rating of the Housing Finance Company's (Iskan) KWD25mn unsecured bond to B+, in view of the significant deterioration in the quality of the Company's loans and advances book, even though this is mitigated to some extent by the collateral held.
This rating also reflects the Company's high assets and revenue concentration to the weak real estate sector in Kuwait, continued weak income generation capacity, tighter liquidity and the still high leverage, as well as funding concentration. The 'Negative' Outlook is also maintained in view of the concerns of the poor quality of its loans and advances book, as well as the continued uncertainty as to the sustainability of the earnings recovery given the prolonged downturn in the real estate sector in Kuwait.
Despite some diversification, Iskan's largest investments, which constitute almost half of its asset base, remain concentrated in the form of residential and commercial plots in the Khairan Pearl City project. A large proportion of recent contributions to income were in the form of non-cash valuation gains or losses on these properties, which raises the question of the quality of the Company's earnings.
With the downturn of the real estate sector in Kuwait, the limited sales to end 2010 of a project that is such an important component of the asset base and contributor to earnings is also viewed with some concern. Management has, however, subsequently advised that some sales have taken place in Q1 2011, although the numbers involved remain fairly modest given that it is still early in the quarter.
The quality of the Company's loans and advances book has weakened significantly with the classification of a large amount of non-performing leasing and commercial loans. While the rise in non-performing loans (NPLs) in money terms has largely stabilised (with some improvement seen in 2010), the Company's NPL ratio nevertheless remains very high. Loan loss coverage continues to be very low, as the Company do not take any provisioning on its non-performing commercial and leasing NPLs. Although these un-provided NPLs are - in book-keeping terms - fully secured by collateral (largely properties), this low coverage is considered by CI to be neither prudent nor acceptable. It should also be pointed out that the Company remains in compliance with Central Bank of Kuwait requirements on provisioning due to the levels of collateral held.
The main positive factor for the Company is the continued reduction of total borrowings, which have helped to lower leverage and financing costs. While leverage is considered acceptable for a financing company, it is nevertheless very high for the Company's investment business model. With the focus on debt repayment, the Company's liquidity has weakened, although this is largely compensated by the improvement of the Company's debt maturity profile and supported by the collections of loans and advances.
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