Moody's downgrades NIG to 'B3', outlook changed to 'stable'

10/08/2011 00:00 AST

Moody's Investors Service has downgraded to B3 with a stable outlook from B2 with a negative outlook the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of National Industries Group Holding S.A.K. (NIG), as well as the instrument rating for the 475 million US dollar Sukuk issued by NIG Sukuk Ltd, the ratings firm said in a statement on Tuesday.

Ratings Rationale

NIG has taken in recent months a number of steps to reduce its exposure to refinancing risk by renegotiating on a longer-term basis some short-term credit facilities in conjunction with formulating and beginning to pursue various strategies in anticipation of redeeming and refinancing the August 2012 Sukuk maturity which Moody's regards as being supportive for NIG's overall credit profile. In that context, the downgrade of NIG's ratings to B3 with a stable outlook reflects a combination of factors that include (i) the execution risk associated with the steps still to be taken in anticipation of the Sukuk maturity in 12 months time to ensure a strengthening of its overall risk profile and a reduction of the group's default risk combined with the fact that (ii) it may take some time for NIG to strengthen its current financial profile where Moody's anticipates that some of its key credit metrics will remain more in with a single B credit profile over the next 18-24 months.

In that respect, Moody's notes in particular NIG's highly levered capital structure as expressed by a market value leverage ratio of above 51 percent as of end of June 2011 and a cash coverage ratio (defined as cash dividend and interest income to cash interest expense) expected to remain below 1.0x in the coming two years. While some core industrial and commercial holdings have improved their financial performances in 2010, the overall ability of these core holdings to upstream significant dividends to support NIG's financial profile is not expected to improve significantly in the near term, although Moody's recognizes that NIG could rely on its most liquid holdings to address any shortfall.

The decision to assign a stable outlook reflects the fact that the strategies being considered in preparation for the 2012 Sukuk maturity appear achievable, though with some execution risk where that execution risk is now adequately captured at the current rating level.

A market-value-based leverage returning to levels of below 50 percent (from the current 51 percent) on a sustainable basis and NIG strengthening its cash coverage metric such that it begins trending solidly above 1.0x could result in positive pressure on the ratings. Moody's would also expect the company to continue to term out some of its debt while having adequate cash coverage of interest and debt amortization commitments.

Further downgrade could result from increased default risk that could be triggered by deteriorating liquidity or impaired refinancing ability, e.g. were NIG's relationship banks to call upon short term lines in a material fashion.

The principal methodology used in rating National Industries Group Holding S.A.K. was the Global Investment Holding Companies Industry Methodology published in October 2007.

Al Watan