Housing Finance Company (Iskan) ratings action

16/03/2013 09:04 AST

Capital Intelligence (CI), the international credit rating agency, today announced that it has downgraded the Bond Rating of Housing Finance Company (Iskan)'s KWD25mn unsecured bond to 'C' from 'B-', in view of the uncertainty surrounding 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 'Negative' Outlook is maintained in view of the challenging operating environment, and the uncertainty as to any short-term recovery in revenue.

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 portfolio remained weak, characterised by a high non-performing loan (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. While the unprovided NPLs are fully secured by collateral (largely real estate), 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 the 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 ability to timely rollover/extend debt obligations, thus improving its debt maturity profile. This constitutes the main positive aspect of 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 2013. Management is actively pursuing a number of options that include 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 raises concerns, in view of the prevailing conditions in the 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 and its original core activities focused on 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, Iskan is today primarily a real estate investment holding company.

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