Top ratings agency Moody's said it has changed Dar Al Arkan Real Estate Development Company (DAAR
)'s outlook to stable from positive.
Moody's has also affirmed DAAR's B1 corporate family rating (CFR), the existing (P)B1 and B1 ratings for debt issued under the $2 billion trust certificate issuance programme of Dar Al Arkan Sukuk Company and Daar's B1-PD probability of default rating (PDR).
"The change of outlook to stable from positive is due to DAAR's weaker than expected results in 2019 and our expectation that market conditions will remain challenging over the next 12 to 18 months." says Julien Haddad, a Moody's Vice President - Senior Analyst and local market analyst for Daar.
"The rating affirmation reflects the company's strong liquidity profile and its disciplined and conservative approach in managing its debt maturity profile.".
Today's rating action reflects a weaker than expected operating environment in Saudi Arabia with Moody's estimate of real GDP growth of only 0.3% in 2019.
While Moody's expects real GDP to grow by 1.5% in 2020, it also expects non-oil related GDP to contract by 1% (the weakest reading growth since 1986). This is likely to
hamper demand for lands in Saudi Arabia over the course of 2020, and therefore result in negative pressure on Daar's ability to generate revenues and cash flows.
Daar's revenue in 2019 of SR3.5 billion was materially weaker than 2018, falling by more than 45% from a record-high of SR6.4 billion.
While the decrease in revenues was partially offset by an increase in Moody's adjusted gross margins to 24.9% from 17.6% a year earlier, interest coverage (Moody's adjusted EBIT to interest expense) has weakened to 1.6x in 2019 from 2.0x a year earlier, below Moody's guidance of 2.0x for the B1 ratings.
Moody's adjusted debt to book capitalization remained healthy, albeit weaker than in 2018, at 29%.
Moody's expects interest coverage to remain in line with current levels over the course of the next couple of years, due to the weak market environment the company will be facing over the same period.