(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has assigned first time ‘saA-’ Issue Ratings on the Saudi Arabia National Scale to both the Series 8 (SAR422mn) and Series 9 (SAR248mn) Sukuk issues by RHC Sukuk 1 Ltd. The Outlook on the ratings is Stable. The same ratings and Outlook were assigned to the Series 6 (SAR350mn) and Series 7 (SAR350mn) Sukuk – both of which were issued in November 2021.
As the issuer is a special-purpose vehicle (SPV) with no other functions or activities apart from the issue of Sukuk, the credit analysis is mostly based on the Obligor, Rawabi Holding Company (RHC), but also considers the structural features of the Sukuk programme.
The issue ratings are driven by CI Ratings’ assessment of the fundamental credit strength and general repayment capacity of Rawabi Holding Company (RHC; the Obligor). This is because RHC’s payment obligations under the transaction documents constitute direct, unconditional, unsubordinated and unsecured obligations of the Obligor 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 of Saudi Arabia 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: (i) marine; (ii) oilfield services; and (iii) 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. Governance standards are high and ESG programmes are in place.
CI views the group of companies owned by RHC (Group) as a single credit due to the high level of operational and financial integration among the businesses; we therefore base our financial analysis on the consolidated results of RHC and its subsidiaries. The finances of the Group 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.
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 governmental or semi-governmental in a highly rated sovereign. This has provided the Group with stable core revenue streams despite what have been at times challenging operating environments. Given the KSA government’s stated policy of continuing to invest in oil and gas, this revenue stream stability should endure.
The Group also benefits from a well-balanced debt maturity profile that has a high longer term component of bank debt with some facilities running out to 2030.The bank lender base is well diversified and supplemented by a successful ongoing Sukuk programme that has improved the overall debt structure. Although Sukuk tenors in KSA are shorter than typically seen elsewhere in the GCC, they provide valuable diversification for RHC as the Sukuk issues so far have been placed mainly with non-bank investors. While there is a spike in debt repayments this year (with SAR958mn in Sukuk principal falling due) and in 2023 (with another SAR1,373mn 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 given the heavy oversubscription of the late 2021 Series 6 and Series 7 issues by RHC Sukuk 1 Ltd. and the strong appetites for the current Series 8 and Series 9 issues. Moreover, the Group enjoys a high level of committed but undrawn bank lines as an alternative source of available funding.
The Group’s main credit challenges include the currently high leverage, high debt level, and a just adequate level of EBIT interest coverage. While gross margins remain strong, this is unfortunately not the case for overall profitability. This could become a more serious potential weakness in that EBIT interest coverage is still just adequate, while bottom line profitability is under pressure from what are currently high finance costs. This leaves the Group vulnerable to the anticipated rises in USD interest rates as the linkages between SAR and USD interest rates are close given the longstanding exchange rate peg. As the Group has already done what it can to optimise terms and conditions on its financing facilities, the only way to reduce costs going forward is to lower the level of borrowings – something that will hopefully be achieved by the planned Rawabi Energy (RE) IPO.
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. This will in particular be the case when order flow from Saudi Aramco is strong, requiring new vessels to be added to the fleet. In time, however, operational cash flows from existing contracts will eventually match and then exceed CAPEX outflows, enabling free cash flow to become positive.
The planned IPO of RHC’s subsidiary RE in the last quarter of this year is expected to provide RHC with the resources to pay down a significant portion 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 during the period of low oil prices) Saudi Aramco 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 (5-7 years) 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 2020-22. In the longer term, however, growth in volumes in businesses with other customers (such as construction) and in other geographies may eventually reduce the current concentration risk by customer, but the geographical and sector concentrations will persist.
Rating Outlook
The Stable Outlook indicates that the ratings on the two Sukuk series are unlikely to change over the next 12 months. This base case continues to assume that the planned IPO of RE 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 on the Sukuk ratings to Positive. Such an upward change would require improvements in leverage, debt-to-equity and EBIT interest coverage ratios of a magnitude that were 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 on the Sukuk ratings to Negative. The most likely immediate prompt for such a downside scenario would be a serious delay to the RE IPO and, consequently, to the timing of expected improvements in debt- equity 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 and less material. Even if the IPO is successful, the anticipated secular rise in the interest rate environment may well put pressure on the Outlook as this could 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 ratings.
*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.
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
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 FY2017-21. 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.
The principal methodologies used to determine the ratings are the are the Corporate Rating Methodology (see the Bond Rating Methodology (see and the National Scale Ratings Criteria for Saudi Arabia, dated 16 November 2020 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
This is the first time CI has assigned National Ratings to Series 7, 8 and 9. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.
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