Moody’s downgrades Qatar Alaqaria, on review for downgrade

Moody's Investors Service has downgraded the ratings for Qatar Real Estate Investment Company (QREIC Alaqaria) and the USD 300 mln Trust Certificates due 2012 (sukuk), issued by Qatar Alaqaria Sukuk Company, to Baa1 from A2. Ratings have been kept on review for further possible downgrade following the company's announcement that it would become a fully-owned subsidiary of Barwa Real Estate Company once the transaction closes.
The proposed change in ownership, by which Barwa would become the new direct majority shareholder of QREIC, impacts the high support levels that Moody's has so far incorporated into the ratings as QREIC becomes further removed from government levels. Although the government will retain a minimum direct 45% stake in Barwa, in Moody's opinion support mechanisms to Barwa and ultimately QREIC as a subsidiary of Barwa might not be extended in the same way. Accordingly, support assumptions have been lowered resulting in the two-notch downgrade to Baa1.
Baa1 ratings continue to take into account the integral part QREIC plays in the economy of Qatar and its strategic importance as a service provider to the national hydrocarbon industry, which warrants uplift from its baseline credit assessment (BCA). The review will also focus on the BCA, or standalone credit profile including the operating performance, expansion plans, future funding requirements and the funding mix as well as how recurring cash flows match the debt maturities.
On January 10, QREIC and Barwa both announced the agreement of initial terms of their proposed merger under which QREIC will become a subsidiary of Barwa, subject to the acceptance of the tender offer for QREIC shares. Under the proposal, Qatari Diar, which currently directly holds 27% of QREIC and 45% of Barwa respectively, would retain a minimum 45% stake in Barwa and could own indirectly 45% of QREIC. It is Moody's understanding that the proposed structure does not trigger a change of control clause of the sukuk as minimum ownership levels and board composition would be maintained.
QREIC, headquartered in Doha/Qatar, provides housing and related facilities in industrial cities under long term contracts to Qatar's growing hydrocarbon sector. Accordingly, its earnings are predominantly generated from long-term rental contracts with government and quasi-government tenants. The company also has a small commercial real estate business. Alaqaria is 27% directly owned by Qatari Diar, with the remainder listed on the Doha Securities Market.