JEDDAH – Standard & Poor's Ratings Services affirmed its ‘B+' long-term corporate credit ratings on Saudi Arabia-based property developer Dar al Arkan Real Estate Development Co. ( DAAR ). The outlook is positive. At the same time, we affirmed our ‘B+' senior unsecured debt rating on sukuk issued by the company. Under our methodology, we continue to rate the sukuk debt at the same level as the corporate credit rating given that priority liabilities account for less than 15 percent of the company's total assets. The affirmation incorporates our assessments of DAAR ‘s business risk profile as “fair” and its financial risk profile as “aggressive.” “Our view of DAAR ‘s business risk largely reflects the group's exposure to cyclical and capital-intensive property development activities. We believe this risk is mainly exacerbated by the limited market for presales and the absence of land optioning, which is not Sharia-compliant. We also factor in the fairly immature, opaque, and highly fragmented housing market in Saudi Arabia, the volatility of revenues from land sales, which typically depend on a handful of large transactions, and potential execution risks from the group's increasingly large development projects. In addition, Saudi Arabia's underdeveloped mortgage industry restrains the sector, although this could change over the next five years following modifications in legislation,” S&P said. The weaknesses are partly offset by Saudi Arabia's favorable demographic and economic fundamentals, and DAAR ‘s fairly strong market position, sizable and conservatively valued land bank, market knowledge, and consistently high margins. The group's future margins will ultimately depend on total revenue composition, with rental activities generating wider margins than developments, the report added. DAAR ‘s financial risk profile is “aggressive,” in our opinion. On December 31, 2013, the company had total debt, after our adjustments, of SR4.1 billion ($1.1 billion). Under our base-case scenario, we assume stable revenue and margins for 2014 and 2015. We expect DAAR ‘s leverage metrics to stay comfortably within our expectations for the ratings, with fully adjusted debt to EBITDA of 3.9x on Dec. 31, 2013. DAAR is classified as volatile under our cash flow criteria because we expect its cash flow/leverage ratios to weaken by one or two categories during periods of stress. “We therefore apply a one-category downward adjustment to our initial financial risk score for DAAR , which results in our assessment of its financial risk profile as “aggressive” rather than “significant.” In addition, one notch from ‘bb-' anchor for DAAR was deducted, based on S&P's assessments of its business risk and financial risk. This downward adjustment takes into account our comparable ratings analysis modifier, or our holistic view of the group's stand-alone credit profile, in which we evaluate the group's credit characteristics in aggregate. — SG
