UAE-based National Central Cooling Ratings cut to 'BB'; off CreditWatch; outlook developing

The outlook is developing. At the same time, the debt rating on the senior secured sukuk certificates due 2011 issued by Tabreed 06 Financing Corp. was lowered to 'BB' from 'BBB-' and the debt rating on the subordinated convertible sukuk certificates due 2011 issued by Tabreed 08 Financing Corp. was lowered to 'B' from 'BB'. All the ratings were removed from CreditWatch with negative implications, where they were placed on July 2, 2008, following the announcement of Tabreed's review of its business model with the intention to increase equity returns.

Standard & Poor's credit analyst Karim Nassif, said:

"The rating actions reflect a deterioration in Tabreed's credit quality following a weaker-than-expected financial performance partly resulting from higher-than-anticipated capital expenditure."

This, in part, has contributed to increasing concerns regarding the company's liquidity over the next six to 12 months. As a result, we now view Tabreed's stand-alone credit profile to be in the low 'BB' category.

At the same time, we have reviewed our ratings approach to Tabreed in view of the increasing government and quasi-government ownership and involvement in the company's operations and finances--principally through the Abu Dhabi owned investment company Mubadala Development Co. PJSC (AA/Stable/A-1+)--and the strategic importance of the company to the development of Abu Dhabi. We have changed our analytical approach to now consider Tabreed as a government-related entity (GRE). Accordingly, we consider that Tabreed should, as a result of this relationship with the government or its agencies, benefit from a one-notch uplift to its stand-alone credit quality. Notably, further notches for government support could be applied if it becomes apparent that Mubadala and/or the Abu Dhabi government are willing to extend more explicit and timely financial support for Tabreed, particularly in relation to the company's liquidity needs.

The rating action on the Tabreed 06 senior secured certificates mirrors the action on the long-term corporate credit rating. The rating action on the Tabreed 08 subordinated instrument reflects an additional notch for subordination from that previously considered now that the corporate credit rating on Tabreed is speculative grade. We consider that there are limited prospects for recovery of the Tabreed 08 notes due to their subordinated nature.

We consider the company's previously strong business profile as having weakened to satisfactory. This reflects a number of factors including: a significantly higher-than-anticipated capital expenditure over the last two years compared with original expectations (with higher-than-anticipated future committed capital expenditure over the 2008-2010 period); weaker-than-anticipated operating performance in terms of revenues and operating cash flows from the company's principal Chilled Water business segment, resulting in reduced profitability; as well as ongoing delays to concluding the joint venture with Aldar Properties PJSC (A-/Stable/A-2).

There remains, however, the potential for improvement in the company's revenues and operating cash flows from the Chilled Water business over the medium term as a result of the 340,000 tons of new chilling capacity due to be installed. However, to fully realize these benefits, Tabreed will need to improve its enforcement of payments due from commercial customers, which are about one-half of overall chilled revenues.

The company's already aggressive financial profile has further weakened, and we now consider this to be highly leveraged. This reflects the company's relatively weak and declining liquidity position, which requires both asset sales and the agreement of new facilities to meet future forecast financing needs. The company's projected negative free operating cash flow--funds from operations (FFO) excluding working capital changes and minus capital expenditure--is likely to continue beyond 2010. The financial profile also reflects weaker-than-anticipated financial metrics, including FFO to debt unlikely to reach 13% by year-end 2010 and debt service coverage ratios under Standard & Poor's criteria (which include UAE dirham {AED} 367 million principal repayment of the 2009 sukuk)likely to be below 1x in 2009, necessitating further drawing on debt facilities.

As of November 28, 2008, Mubadala (a wholly owned investment vehicle of the Abu Dhabi state) has increased its equity ownership in Tabreed to 17% from less than 10%, and alongside other government-affiliated companies, the Emirate now owns about 28% of Tabreed. In addition, the government has increasing strategic influence over the company through board representation. The chairman of Tabreed is the managing director of the state-owned International Petroleum Investment Corp., while the vice chairman is chief operating officer of Mubadala. Tabreed's vice chairman is also head of its Finance Committee and is playing an increasing role in steering a new business plan in 2009. We also understand that Mubadala is supporting Tabreed with arrangements to secure the necessary liquidity funding in 2009 and that Tabreed is integral to the provision of district cooling under the Abu Dhabi 2030 development plan through, among other things, its monopoly position as the provider of district cooling for some of the Aldar and Sourouh led real estate projects.

A downgrade could occur if the company's liquidity position further weakens, for example through a failure to agree the joint venture terms or as a result of weaker-than-expected financial performance. The scope for an upgrade resulting from an improvement in operating performance is limited in the short term, but further tangible evidence of timely government support could lead us to consider a further notch uplift for government support.

At the same time, the company is continuing to consider the potential for the execution of a new business model under which the company proposed to create a new asset holding company into which it divests existing and future cooling assets. We will continue to monitor the potential effect of the implementation of any new model on the ratings.