Moody's affirms Arabian Centres rating at Ba2, negative outlook

Moody's Investors Service reaffirmed Arabian Centres Company’s (ACC) Ba2 corporate family rating, the ratings agency said in a statement on Thursday.

Moody's has also confirmed the Ba3 rating on the $500 million sukuk due in 2024 issued by Arabian Centres Sukuk Limited. At the same time, Moody's has changed the outlook to negative from ratings under review. This concludes the review initiated on May 26, 2020.

"The negative outlook reflects the challenging operating environment ACC will face due to the business disruptions caused by the outbreak of the coronavirus", says Julien Haddad, a Vice President -- Senior Analyst, and the local market analyst on ACC.

"The confirmation of the CFR reflects the view that ACC has good liquidity to withstand the cash flow impact stemming from discounts on rents provided to the retailers and that leverage will increase to a level still commensurate with the Ba2 CFR,” he added.

The rapid and widening spread of the coronavirus outbreak and the deteriorating global economic outlook are creating a severe and extensive credit shock across many sectors, regions and markets. The retail real estate segment is one of the sectors most affected by the shock given the closure of malls and falling retail sales which has been putting negative pressure on the financial health of retailers. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The affirmation of the Ba2 CFR reflects the company's progress in renewing leases despite the challenging operating environment and Moody's understanding that lease renewal rates have been relatively stable. During the first quarter of FY2021, ACC renewed 750 leases, decreasing the percentage of leases expiring in calendar year 2020 to 21.1% from 38.5% as of March 2020.

The confirmation of the ratings also reflects ACC's good liquidity despite the lost rental income because of discounts agreed with tenants for the lock down months. As of June 2020, ACC had SAR921 million of cash and cash equivalents, which, in addition to an expected SAR1 billion of funds from operations are more than sufficient to cover debt repayments of SAR90 million, capital spending of SAR610 million and dividend payments of SAR423 million over the course of the next twelve months.

However, Moody's notes that ACC has limited headroom under some of its maintenance covenants. The rating assumes that ACC will obtain waivers or amendments from its lenders sufficiently in advance of the next reporting period.

In light of the negative outlook, an upgrade is unlikely at the moment. The outlook could change to stable from negative if ACC's operating performance continues improving, in line with July, reflected by increasing footfall, rent collections and occupancy ratios. At the same time, other factors that could lead to changing the outlook to stable from negative include (1) Net debt to EBITDA decreasing to below 6.5x; and (2) Fixed charge coverage remaining above 2.5x.

ACC's ratings could be under pressure if the operating environment in Saudi Arabia deteriorates, leading to lower occupancy rates and deteriorating operating cash flows, including lower collections and higher receivables from related and third party tenants. At the same time, other factors that could lead to downgrading ACC's ratings include (1) Net debt to EBITDA increasing above 7.5x; and (2) Fixed charge coverage decreasing below 2.0x.