Gulf Finance House: S&P Downgrade More Info Than Just the Downgrade

You've probably seen the news that Standard and Poors has downgraded GFH to SD (Selective Default) based on its failure to pay the full US$300 million due on 10 February.

Interestingly, GFH's website still shows it with an investment grade rating (BBB-) from Standard and Poors.  You may recall that S&P downgraded GFH on 26 November to BB+, 14 January to B+ and 3 February to CC prior to the very recent downgrade to SD.  That's what we in the "Islamic" banking game call an example of  كلام شريف

The rationale for the downgrade?  S&P considers the US$100 million for six months to be a distressed debt exchange and not a voluntary new facility.  

But there are three other items in the press release worthy of comment.

First, that GFH is in discussions with other lenders for a similar partial payment extension on another  US$100 million facility.  I think this is due in two equal tranches in 2010 and 2011.   Unfortunately, GFH's 3Q09 interim financial is silent on the pattern of upcoming maturities of debt. 

Second, the US$100 million announced 10 February was apparently not a new facility but the extension of maturity of part of the amount of  the existing facility. S&P comments that  GFH achieved the partial extension by executing the facility's "deed of extension" clause.  

Yet in its 10 February press release GFH said: "GFH has replaced its $300m syndicated facility with a maturity date of 10th of February with a new $100m murabaha which has a tenor of six months, having repaid $200m on the initial due date."  

Referring to this as a "new facility" sounds much better than an extension of maturity.   A refinancing always has much better connotations than a rescheduling.  If S&P is correct (and for some strange reason they have more credibility at SAM than GFH does), this is what it was - a rescheduling.   كلام شريف

Calling it a rescheduling may also sound better from an Islamic standpoint, though one presumes the Shari'ah Board will look closely at the "new" and/or "extended" facility.  

Third, S&P said that after the second rescheduling is accomplished, it will look at GFH's credit again and anticipates that it could upgrade them to CCC.  That I suppose is comfort.  It will represent an increase over the CC level assigned them on 3 February.  It will, however, leave them in "high yield" territory.