Moody's assigns Baa1/P-2 ratings to Kuwait Projects Company

Moody's has also assigned short term ratings of Prime-2 to KIPCO. The outlook is stable. This is the first time that Moody's has assigned a rating to KIPCO.

"KIPCO's ratings are supported by a good flow of dividends from its controlled subsidiaries, added liquidity from portfolio investments and a generally moderate financial policy,"

says Philipp Lotter, Dubai/DIFC based Senior Vice President at Moody's and lead analyst for KIPCO.

"Nonetheless, our expectation of additional start-up businesses and acquisitions, limited diversification and the credit quality of KIPCO's
existing core businesses constrain ratings at their present level," Lotter adds.

Moody's assesses KIPCO's credit quality primarily as an investment holding company, which over recent years has increased its investments in its core subsidiaries to acquire controlling stakes. These include Burgan Bank (a Kuwaiti commercial bank), United Gulf Bank (a Bahrain-based investment and wholesale bank and asset manager), Gulf Insurance Company (one of the region's largest insurers) and Showtime (a regional satellite pay TV broadcaster). Dividends from these entities currently represent around half of KIPCO's cash flows. The other half is contributed by traditional investment company cash flows, including interest income and income from securities.

The core subsidiaries' underlying credit profiles play a fairly significant role in determining KIPCO's ratings, given their large contribution to cash flows. However, KIPCO's credit profile is also influenced by some liquidity from other investments, which represent around $350m in asset value, as well as additional $2.0bn of indirect investments at its core subsidiaries. Moody's also believes that there is scope for additional liquidity from disposals in the core subsidiaries themselves, although this is currently restricted given their significant contribution to KIPCO's earnings profile.

Business diversification provides for additional support to KIPCO's ratings.

Burgan Bank has a Bank Financial Strength Rating (BFSR) from Moody's of C-, which is equivalent to a Baa2, and United Gulf Bank has a BFSR of D+ (equivalent to a Ba1). Both contribute approximately 38% to KIPCO's cash flows. Moody's does not rate Gulf Insurance Company (GIC) and Showtime.

However, GIC is likely to be of sound investment grade credit quality and therefore contributes positively to KIPCO, whilst Showtime is a more speculative undertaking.

In 2007, KIPCO sold its combined majority stake in a regional mobile operator, National Mobile Telecommunications Company (also known as Wataniya) to Qatar Telecom, which resulted in a net gain of $1.76bn. Accordingly, KIPCO currently enjoys an unusually strong cash balance which will be used in part to invest in new business acquisitions and start-ups. KIPCO's risk profile is therefore likely to change as the company makes new investments. Moody's takes comfort from management's objective of managing market value leverage below 25% and expects KIPCO to further broaden its financial services operations, whilst also assessing opportunities in healthcare, education and residential housing.

With the exception of approximately $180m of debt at Showtime, KIPCO does not guarantee for any of its subsidiaries' debt obligations, and accordingly Moody's primary focus is on KIPCO's parent company accounts rather than the consolidated statements. KIPCO's existing EMTN programme includes a cross default clause with its core subsidiaries, excluding Showtime, which Moody's highlights as an area of concern, though partially mitigated by the generally good credit quality of its subsidiaries. Moody's expects any future financing arrangements to be free of such cross default provisions.

KIPCO's liquidity is currently strengthened by its substantial cash balance, although its short term maturities are currently higher than management's 20% target. Management has recently agreed a refinancing of the debt maturing in Q4, 2008 with a group of international banks. The term of this refinancing is three years. This transaction has a significant impact on the average life of the company's borrowings, which increases from 1.7 years to 2.7 years. Management intends to extend the average life of its borrowings further once market conditions improve.

Moody's also takes comfort from the availability of $527m in unused committed credit and money market lines, although these mature in less than 12 months and are thus subject to annual renewal.

Given the evolving nature of KIPCO's business, key drivers of KIPCO's ratings profile rest with the magnitude and nature of the group's future investment choices. In particular, Moody's expects KIPCO to maintain an appropriate financial profile so that market value leverage is kept to 25% and cash coverage from dividends is at least 2 times. At their current contributions, a material deterioration of KIPCO's core subsidiaries' credit quality, or impairments to KIPCO's ability to access dividends from them, could also have affects on KIPCO's own ratings. As KIPCO becomes more diversified, the correlation between its core subsidiaries and KIPCO is likely to subside.

Over time, KIPCO is expected to add more diversified minority stakes to its asset base, thus also improving the liquidity profile of its assets.

Whilst upside to KIPCO's ratings is currently limited, ongoing attempts to diversify its asset base whilst maintaining a moderate financial profile and greater liquidity could help strengthen KIPCO's credit profile over the medium term.