Moody's downgrades Gulf Investment Corporation, Kuwait

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At the same time, Moody's downgraded to A3/Prime-1 from A2/Prime-1 the company's long- and short-term deposit ratings, and to A3 from A2 GIC's senior unsecured debt rating. The outlook on all of GIC's ratings is changed to negative from stable reflecting the enduring pressures on its performance in light of the prevailing international market conditions.

Stathis Kyriakides, AVP-Analyst in Moody's Financial Institutions Group, said:

'The progressive and ongoing aggravation of the global credit crisis and the steep decline in both international and regional equity markets since July 2008 has caused GIC's position to weaken within the D+ BFSR range. The negative rating outlook reflects that unless markets stabilise and/or the company halts the negative trend in its performance, the downwards pressures on GIC's D+ BFSR will increase.'

As previously highlighted by Moody's, GIC lacks business diversification, has a narrow customer franchise, while its performance has been reliant on the high beta part of its balance sheet.

Despite the company's efforts to diversify its portfolio of financial instruments, both in terms of geographies as well as instrument types, correlations under current extreme market stresses have converged causing a rapid deterioration in the company's performance.

Although the company has substantial hidden value in its 'Projects and Equities Participations' portfolio, Moody's notes that revenues generated by this business have always been bulky and temporally inconsistent.

Moreover, as previously identified, unlocking such hidden value is challenging in unfavourable market conditions.

Mr. Kyriakides said:

'The downward rating pressure is to some extent being eased by GIC's gradual reduction in its reliance on repo funding through an increased focus on institutional deposits.'

Moreover, during September 2008, the company has attracted deposits from GCC institutions primarily owned by its shareholders, thus representing tangible shareholder support. This caused the composition of GIC's liability structure to shift, with deposits, repos and term financing funding 34%, 20% and 25% of assets respectively as at Q3 2008, compared to 30%, 26% and 20% respectively at year-end 2007. Moody's notes that GIC's diminishing reliance on repo funding remains material, although GIC's ownership is likely to keep access to incremental international credit open (albeit at rising costs in line with market conditions).

Moreover, the steep downturn in international and regional markets, particularly since June 2008, has caused GIC to record material mark-to-market losses.

GIC incurred a decline in revaluation reserves of $355m as at August 2008, causing the revaluation reserve to move into negative territory.

'As a result, the company's balance sheet had contracted by approximately 10% as at 31 August 2008 compared with year-end 2007, with losses and revaluation reserve write-downs absorbing 22% of the company's capital, and more write-downs expected by the end of 2008,' explains Mr. Kyriakides.

Moody's observes that GIC's bank-like Basel II capital adequacy ratio as at September 2008 has declined to around 13% compared to 20% at year-end 2008. Nevertheless, Moody's notes that GIC has an additional $1.1bn of authorised but unpaid share capital, which, if accessed to support the company's business objectives, would to some extent both alleviate current stresses as well as exhibit strong shareholder support.

However, Moody's cautions that this would not automatically address some of the fundamental issues facing GIC, namely those of weak business diversification, narrow scope of operations and small franchise.

Headquartered in Kuwait City, GIC reported total assets of $8.26bn as of June 2008.