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RAM Ratings downgrades Al Bayan's Sukuk rating to BB2, maintains negative Rating Watch.

RAM Ratings has downgraded the rating of the MYR 1.0 billion Sukuk Wakalahh (2013/2023) issued by Al Bayan Holding Company (the Group) through its special-purpose vehicle, ABHC Sukuk Berhad, to BB2(s) from A1(s).

The steep downgrade is premised on the substantial deterioration in Al Bayan's liquidity position beyond our expectations. The Group failed to meet the minimum required balance for the Finance Service Reserve Account (FSRA) under the Sukuk Wakalah which triggered an event of default. In addition, RAM Ratings has not been able to obtain satisfactory clarification from Al Bayan on its proposed resolution of the breach.

Funds for the repayment of the MYR 100 million of outstanding Sukuk, which will mature on 16 December 2016, is to be gradually built up in the FSRA. Al Bayan has breached the 30-day remedy period for the first payment of MYR 25 million due on 16 September 2016, as well as the second payment of MYR 25 million due on 16 October 2016. We understand from the management that the funding of the FSRA will depend on the collection of receivables from government projects, and they do not intend to fund the FSRA through other resources. The Group's priority is the repayment of the Sukuk Wakalah before the maturity date; the management is confident of its repayment ability based on the cashflow from receivables, unutilised credit limits and other sources. Nonetheless, we have not received any documentation to substantiate these claims.

As previously highlighted, we opine that Al Bayan's liquidity position is pressured, with short-term debts having increased substantially to fund its hefty working-capital requirements following the delay in collections from government projects. In addition, we are mindful that the construction sector faces heightened risk of tight credit from financial institutions, given the Kingdom of Saudi Arabia's weaker fiscal position and persistent delays in progress payments as well as a general downtrend in projects in this sector. We believe that the receivables collection period for government contracts may have lengthened further beyond our initial expectations, thereby resulting in a significant deterioration in Al Bayan's liquidity position. However, the Saudi Finance Minister has recently stated that payments to the construction sector will increase.

RAM will maintain close monitoring of the relevant developments. If Al Bayan continues to not meet the repayment requirements, we are unable to obtain the requisite critical information and clarification to undertake a meaningful assessment of its credit position, or if the Group's liquidity position deteriorates, the rating of the Sukuk Wakalah may be downgraded further.

Al Bayan is a family-owned, Saudi-based conglomerate; it is mainly involved in specialised construction of public infrastructure and the supply of a wide range of equipment as well as IT products and services, primarily servicing the government. ABHC is a special-purpose vehicle wholly owned by Al Bayan; it had been incorporated in Malaysia as a conduit to facilitate the Group's Sukuk transaction. Under a Kafalah agreement in favour of ABHC, the Group provides an irrevocable and unconditional guarantee to the Sukuk holders. As such, the enhanced rating of the Sukuk Wakalah is based on Al Bayan's credit profile.

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Publication:CPI Financial
Date:Oct 20, 2016
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