Moody's Investors Service has downgraded the corporate family rating (CFR) and probability of default rating (PDR) of Dubai-based Gulf General Investment Company (GGICO) by one notch to B1 from Ba3. The outlook remains negative.

Moddy's said the downgrade reflects its concerns that GGICO will not be able to meet the credit metric guidance set for Ba3 category until the end of 2012 coupled with a continued deterioration in operating performance in the first six months, albeit partly driven by non-recurring, non-cash elements.

The ratings at the B1 level also take into account the transitioning of GGICO over the coming two to three years during which management intends to reduce its dependence from residential real estate sales whilst growing its manufacturing and services activities into larger cash flow contributors, a statement from Moodys said.

The rating agency noted the strength and the resilience of some of the existing businesses such as ELCO (lubricants) in these segments, but also highlighted that a number of greenfield operations are still in their start-up phase where the commercial success was subject to higher uncertainty.

Moody's anticipates a significantly slower deleveraging pace from the current high leverage (6.6 times debt to Ebitda as of December 2009) with key metrics more commensurate with the B rating category for a prolonged period of time, thereby departing from the previously anticipated strengthening into the Ba3 positioning.

The net debt to Ebitda is expected to remain well above five times in the medium term and FFO to net debt is expected to remain in the low to mid teens range .

The first half operating performance has been undermined by non-recurring items and a reported net loss of Dh36 million versus an Dh 219.8 million net profit for the same period in 2009, the Moody's said in the statement.

The B1 CFR assumes that GGICO maintains a deleveraging trajectory towards five times net debt to Ebitda as well as funds from operations to net debt constantly above 10 per cent, it added.-TradeArabia News Service