Moody's affirms ratings on Gulf Investment Corporation

At the same time, Moody's affirms the company's A2/Prime-1 long- and short-term deposit and A2 senior unsecured debt ratings. The outlook on all ratings remains stable.

On 21 February, GIC announced a $253m profit for 2007. The results included $105m of extraordinary and non-recurring income arising from the sale of the residual (and previously written-off) Iraqi debt held by GIC, and following $246m in provisions made primarily against impairments in the value of the company's investments in SIVs and structured credits.

Moody's has been monitoring GIC's total exposure to asset classes, such as structured products, and investment in SIVs, that were affected by the
subprime-related market turmoil. During December 2007, the company redeemed part of its SIV exposure (amounting to around $102m), receiving cash against part of the cost of its investment, while committing to the purchase of a vertical slice of the SIVs' assets at market prices. This caused the company's portfolio of structured assets to more than double.

However, the quality of the acquired portfolio appears to be good: it includes highly-rated financial institution bonds, CLOs and CDOs of corporate bonds, although it also includes some riskier assets. In addition, given that these assets were acquired at December market prices, the riskier ones had already been significantly discounted, Moody's notes.

Moody's said that if pressure in the credit markets persists, GIC would likely need to record additional provisions against its portfolio of structured assets, impacting 2008 profitability for a second successive year. However, large-scale write downs of a level capable of impacting GIC's capitalisation are not currently anticipated, particularly given that the company has a comfortable capital cushion, with Tier 1 capital at year-end 2007 standing at an exceptional 20%. Consequently, Moody's considers GIC's D+ financial strength rating as adequately capturing the current risks.

However, Moody's notes that the magnitude of the portfolio of SIV assets purchased --compared to GIC's size -- is very high and that a single action impacted the composition of over 10% of the company's balance sheet. Although the acquired portfolio is in part comprised of good
quality (non-structured) financial institution bonds, GIC's action has increased exposure to structured assets (albeit currently of good quality) at a time when the market is still fluid. Regardless of whether GIC benefits from its aforementioned decision or is compelled to record additional provisions, this suggests a shift in risk appetite.

Consequently, Moody's will continue to monitor developments at GIC. Headquartered in Kuwait City, GIC reported total assets of $9.148bn as of year-end 2007.