Dubai-based ETA Group 'BBB-' rating on watch neg on rising leverage and economic slowdown

Standard & Poor's credit analyst Stuart Clements said:

"These actions are due to concerns over increasing financial leverage, the likely adverse effect of the continuing global economic slowdown on ETA's cyclical activities, and low levels of headroom under financial covenants."

The CreditWatch placement is prompted by our concerns that the global economic slowdown is now adversely affecting ETA's main markets, and we are concerned that this may lead to a drop in trading performance and a further deterioration of key credit ratios, already weak for the 'BBB-' rating category. We also have concerns regarding the tight covenant position and the increasing pressure this may place on liquidity.

ETA's debt levels have risen significantly in recent years to meet increasing working capital demands from both higher commodity prices and the company's rapid growth in revenue. Debt has also increased due to substantial capital investments that will add an additional 37 vessels to ETA's shipping fleet during the next five years. Although increasing profitability and cash generation have partially mitigated the impact on the company's financial profile, key credit measures have weakened, as evidenced by a reduction in funds from operations (FFO) to adjusted debt to about 19% at December 31, 2007, and adjusted debt to EBITDA of 5.2x. Credit ratios are considered weak for the rating category, which requires FFO to debt within the 20%-25% range. The increasing debt levels have also reduced the headroom ETA has within its financial covenants, which is forecast to be tight at 5%-15% during the next 12 months.

Although ETA's operations are well diversified and predominantly conducted with large well-established or government-related entities, we believe that the continuing global economic slowdown is having an adverse effect on demand and pricing in the company's main markets in India, China, and the Gulf Cooperation Council. The significant contract backlog will help soften the potential impact this may have on current trading performance. Nevertheless, the main sectors it operates in--construction, mechanical and electrical engineering, property development, and car trading--are all considered to be highly sensitive to economic conditions. Additionally, the recent collapse in prices in the dry bulk shipping market (81% of ETA's fleet), of about 90% from the 2008 peak, may put pressure on some of its time charter counterparties and lead to some renegotiations. Although ETA's time charter coverage may offer some protection during the next 12-18 months, it will increasingly become exposed to market rates for which the outlook remains gloomy.

We aim to resolve the CreditWatch within 90 days, and the review will enable Standard & Poor's to gain a better understanding of the likely consequences current events are having on ETA's business and financial risk profiles, with a particular focus on leverage and liquidity.