RHC Sukuk 1 SAR523mn Sukuk – National Rating of ‘saA-’ Assigned

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has assigned a first-time issue rating of ‘saA-’ on the Saudi Arabia National Scale to the forthcoming issuance of a SAR523mn Sukuk by RHC Sukuk 1 Ltd. The Outlook on the rating is Stable. This will be the fifth series in the SAR2,500mn Sukuk programme carried out through RHC Sukuk 1 Ltd, an exempted company with limited liability incorporated in the Cayman Islands, by Rawabi Holding Company (RHC) of Saudi Arabia.

The rating on the Sukuk is driven by CI Ratings’ assessment of the fundamental credit strength and general repayment capacity of RHC (the obligor). This is because RHC’s payment obligations under the transaction documents constitute direct, unconditional, unsubordinated and unsecured obligations of the Company and rank pari passu with its other unsubordinated and unsecured financial obligations. The transaction does not contain any structural credit enhancements or result in a degree of effective subordination that would warrant a different rating outcome from that indicated by CI’s assessment of RHC’s general creditworthiness.

Under the transaction documentation, RHC Sukuk 1 Ltd and RHC will enter into a combination of a mudaraba agreement for at least 51% of Sukuk proceeds (to be invested in the Shari’ah-compliant business activities of RHC), and a commodity murabaha agreement for up to 49% of the Sukuk proceeds. The obligor’s payment obligations include quarterly distributions from the income generated from the mudaraba assets and meeting the principal payment due at maturity. As such, the issuer and sukukholders are solely reliant on income from RHC to receive their contractual payments.

RHC is the holding company of a diversified industrial and contracting group which is organised into three broad businesses: (1) marine, (2) oilfield services and (3) contracting, manufacturing and industrial. Much (but not all) of the latter business is related to servicing and supplying companies operating in the oil and gas sector.

CI views the group as a single credit due to the high level of operational and financial integration and we therefore base our financial analysis on the consolidated results of RHC and its subsidiaries. The finances of the group companies are managed centrally with all borrowing and debt servicing arranged and controlled by the centralised group treasury function at RHC. Group entities are also tied through cross-guarantees, with credit lines to subsidiaries guaranteed by the parent (RHC) and credit lines to RHC guaranteed by the subsidiaries.

While the rated Sukuk does not benefit from RHC guarantees for group subsidiaries, the issuer and sukukholders do benefit from various cross-default clauses and financial covenants which link an event of default under the Sukuk programme not only to direct payment or other defaults relating to the Sukuk programme but also to defaults occurring at the RHC and/or its subsidiaries.

The main credit strengths of the group are its strong Offshore Supply Vessel (OSV) and oilfield services franchises, stable revenue streams that have seen little impact from fluctuations in oil prices, and a customer base that is very largely either government or semi-government in a highly rated sovereign. The group also benefits from a well-balanced debt maturity profile that has a high longer term component with some facilities running out to 2030. The bank lender base is well diversified and is supplemented by a successful Sukuk programme. Although Sukuk tenors are shorter than elsewhere in the GCC, for RHC they provide valuable diversification as the Sukuk issues so far have been placed mainly with non-banks. While there is a spike in debt repayments in 2022 (with SAR958mn in Sukuk principal falling due), there are no current reasons to believe that these amounts could not be refinanced in the KSA debt capital markets.

The group’s main credit challenges include high leverage, high debt, and a just adequate level of EBIT interest coverage. The proceeds from the proposed issue are to be used to refinance existing borrowings; overall debt levels would not rise as a result of the issue. While gross margins remain strong, profitability is not strong and could become a more serious potential weakness in that EBIT interest coverage is just adequate while bottom line profitability is under pressure from what are currently high interest charges. This leaves the group vulnerable to any significant rise in USD interest rates as the linkages between the SAR and USD interest rates are close given the longstanding exchange rate peg.

While operational cash flow is satisfactory, the continuing high levels of CAPEX intrinsic to the OSV portion of the business model mean that free cash flow will almost always be under some pressure – and may be negative in some years.

The planned IPO of RHC’s subsidiary Rawabi Energy later this year or in early 2022 is expected to provide RHC with the resources to pay down part of its debt and increase its equity base, resulting in the lowering of both leverage and the debt-to-equity ratio at the consolidated group level.

Concentrations are also a credit challenge. Rawabi Vallianz Offshore Services (RVOS), a key subsidiary, relies on Saudi Aramaco for over 95% of its revenue. The degree of concentration at the oilfield service business is lower, but again Saudi Aramco is a major client. As the OSV business requires high CAPEX whenever new contracts are won, there are continuing pressures on the ability to generate positive cash flow.

While Saudi Aramco (which is considered to be quasi-sovereign risk in an ‘A+’ rated sovereign) uses a range of local OSV contractors (plus a few foreign firms), RVOS has the largest individual share of Saudi Aramco contracts in this area. Given the structure of the oil and gas sector in KSA, RHC’s strong relationship with Saudi Aramco is a critical success factor. Were the relationship to falter, this would put immediate downward pressure on the rating. Equally important is the fact that (unlike many other national oil companies), Saudi Aramco has continued to invest, and their CAPEX remains strong. Moreover, RHC’s businesses serve the production end of Saudi Aramco’s overall activities rather than exploration or oilfield construction and the group has seen order flow rise, not fall. The combination of long (5-7years) contract durations with Saudi Aramco and high contract renewal rates has provided RHC with considerable stability in revenue streams.

The group has been steadily seeking to widen its activities and customer base by sector and geography while also entering new product lines. Despite some successes, the Saudi Aramco concentration is likely to persist given the strong growth in contract awards seen in 2020 and so far this year. In the longer term, however, growth in volumes in businesses with other customers (such as construction) and in other geographies may reduce the current concentration risk by customer, but the geographical and sector concentrations will persist.

Rating Outlook

The Stable Outlook indicates that the rating is unlikely to change over the next 12 months. This base case assumes that the planned IPO of Rawabi Energy is successful and that, as a result, debt-to-equity and leverage ratios on a consolidated group basis will decline in line with CI’s expectations.

Rating Dynamics: Upside Scenario

In the short to medium term, the most likely upside scenario would be a revision of the Outlook to Positive. Such an upward change would require improvements in leverage, debt-to-equity and EBIT interest coverage ratios of a magnitude that was significantly greater than those already forecast for the post-IPO period.

Rating Dynamics: Downside Scenario

The most likely scenario would be a revision of the Outlook to Negative. The most likely immediate prompt for such a downside scenario would be a serious delay to the Rawabi Energy IPO and, consequently, to the timing of expected improvements in debt and leverage ratios. However, it is emphasised that currently available financial forecasts indicate that an improving trend in these metrics would still be in place without the IPO – but that the timeframe would be rather longer. Even if the IPO is successful, a secular rise in the interest rate environment could also put pressure on the Outlook for the rating as this would intensify the existing pressures on profitability and EBIT interest coverage ratios. Finally, any cooling of the vital business relationship with Saudi Aramco would put immediate pressure on the Sukuk rating itself.


*A National Rating summarises the repayment risk of an entity relative to other entities within the same economy. It is not an absolute measurement of risk. National Ratings are not directly comparable across borders.

Contact

Primary Analysts:
Rory Keelan, Senior Credit Analyst; E-mail: rory.keelan@ciratings.com
Kathleen Gamper, Senior Credit Analyst, E-mail: kathleen,gamper@ciratings.com

Secondary Analyst: George Panayides, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2016-19 and Q3 2020. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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