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Tuesday, 30 September 2008

S&P rates Tabreed Sukuk

Tabreed plans to use proposed Sukuk issuance to fund the construction of cooling plants.

Standard & Poor's Ratings Services has assigned its BB long-term debt rating to the proposed non-deferrable, deeply subordinated mandatory convertible Ijarah Sukuk notes to be issued by Tabreed 08 Financing Corp., a special-purpose vehicle (SPV) subsidiary of UAE-based National Central Cooling Co. PJSC, Tabreed; BBB-/Stable/--, that is incorporated in the Cayman Islands. The maturity and size of the Ijara Sukuk notes remain subject to market conditions.
Tabreed plans to use the proposed Sukuk issuance to fund the construction of cooling plants. An Istisna’a agreement and a lease agreement will govern the Ijara Sukuk structure. The Ijarah nature of the Sukuk refers to the sale-leaseback aspect of the transaction and Istisna’a refers to the construction and delivery aspect. On the closing date, the issuer buys the plants or a part thereof from Tabreed and enters into a lease arrangement with Tabreed as lessee. Tabreed will distribute annual profits, or lease payments, to the Sukuk SPV, which will service the coupon payments on the notes over the first three years. At maturity, Tabreed will buy back the cooling plants from the issuer in exchange for shares in Tabreed.
The Sukuk structure contains weaker security features than what we have seen typically in senior Ijarah Sukuk structures. This includes very broad events of default and a limited right to sell the cooling plants upon an event of default. This is in line with the subordination features of the Tabreed 08 Financing Corp. Ijara Sukuk.
Standard & Poor's assigns a high equity content to the notes because they have the following positive characteristics:
-- The notes will mandatorily convert into ordinary shares of Tabreed within three years and
-- Principal and interest payments are subordinated to all of Tabreed's other debt obligations, unless expressly qualified as more junior, and currently rank senior only to common shares.
In their calculation of Tabreed's financial ratios, S&P will classify the whole principal outstanding of the notes as equity. Similarly, coupon payments will be considered as dividends for the purpose of their analysis.
S&P expects the two-notch differential between the rating on the proposed notes and the long-term corporate credit rating on Tabreed to be maintained as long as the latter rating remains investment grade in order to reflect:
-- The proposed notes' subordination and
-- The market risk resulting from the relative evolution of the share price and of the conversion ratio of the instrument.
The instrument will be settled in shares in all cases, apart from possible complete or partial cash settlement if Tabreed were to be declared insolvent in court or if the shares potentially created were to exceed the applicable foreign ownership threshold. Both restrictions are imposed by laws and regulations in the country of issuance, the UAE. Standard & Poor's considers these exceptions as acceptable because they are appropriately remote and the consequent cash claims on Tabreed would remain deeply subordinated. We will regularly monitor the headroom under the foreign share ownership rule, assuming all note-holders to be foreign, apart from those duly registered as domestic. Possible excess foreign ownership would result in our reducing the equity content of the instrument by the amount potentially created above the threshold.
The issue will help increase the equity-like content in Tabreed's financing structure. Standard & Poor's assesses the equity to be created by the issuance of the notes, and their eventual conversion, as permanent in nature, in the context of Tabreed's current financial policy and development plans. Despite this issuance, we expect Tabreed's leverage to remain aggressive over the medium term. The servicing of the bond until conversion may not be deferred. This is not a significant hurdle in our view of the equity content, due to the short time to conversion.

(CPI Financial)
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