Financing model and downturn prove expensive for Tabreed

Tabreed made a Dh1.12 billion (US$305 million) loss last year as the slowing property sector hurt its cooling plant business.

ABU DHABI // Tabreed, the National Central Cooling Company, made a Dh1.12 billion (US$305 million) loss last year as the slowing property sector hurt its cooling plant business. The company's problems led Mubadala Development, the strategic investment arm of the Abu Dhabi Government and Tabreed's largest shareholder, to lend it Dh1.3bn to make it through this year while its executives work to improve its capital structure.

"The economic recession has had an impact on our customers," said Sujit Parhar, the Tabreed chief executive. "It started hitting the real estate sector in 2008, and now it's knocking on to companies that provide services to the real estate sector." The losses for the year came because of Dh1.3bn of write-downs on the company's assets. Most of the write-downs concern assets that are "currently in operation or under development, where fair value is deemed to be less than the actual or estimated cost to increase", as well as cancelled projects and debts that are unlikely to be repaid.

One issue the company is facing is that many of its old contracts with developers left it no recourse if projects stalled or were delayed. New clients would be held to more specific terms in contracts, Mr Parhar said. The company was also negotiating with its previous customers to sign new contracts. Mr Parhar was appointed in May to lead a restructuring of the company and overhaul the way it finances its projects.

At the centre of his efforts is shifting the company from a short-term financing model that needs continuous renewal to one reliant on long-term investors. "We are taking a look at the capital structure of the company, in terms of attaining the right mix of equity and debt," he said. Mr Parhar said the company had not had "specific discussions" about changing the terms of any of its debt and did not plan to, but the board of directors on Monday authorised Tabreed executives to negotiate over the terms on $633m worth of Islamic bonds.

Tabreed's business model is currently "too capital-intensive", with a period of time with low cash flow while it builds plants, said Ian Munro, the head of research at MAC Capital in Dubai. "Aligning the long-term focus of the Tabreed business model with creditors and equity partners of a similar time horizon has been a significant challenge for the company," he said. Last August, Standard & Poor's downgraded Tabreed to "BB minus" from "BB" and placed the rating on credit watch "with negative implications", citing the company's "high ongoing exposure to refinancing risk" and low earnings.

Still, the company considers its long-term growth a solid proposition as Abu Dhabi expands its public housing projects and developments open in places such as Reem Island as part of Plan Abu Dhabi 2030. Tabreed expects to add a further 148,300 tonnes of cooling capacity to its portfolio as it finishes 13 plants and one plant expansion by the end of the year. @Email:[e-mail]