Moody's affirms KIPCO's Baa1 ratings, changes outlook to negative

However, it changed its outlook to negative from stable, reflecting deterioration in the credit quality of some of its core subsidiaries. Moody's has also assigned Baa1 / Prime-2 ratings to KIPCO's existing $2bn European Medium Term Note (EMTN) Programme. The outlook is also negative.

"KIPCO has responded well to a challenging global and local market environment by strengthening liquidity and actively managing leverage in support of credit metrics," says Philipp Lotter, Dubai (DIFC) based Senior Vice President at Moody's and lead analyst for KIPCO.

"However, KIPCO exhibits high concentration of dividend income from three subsidiaries which engage in banking and insurance activities. Our negative outlook reflects a moderately weaker credit trend at two of these subsidiaries, notably Burgan Bank, whose rating was recently downgraded by Moody's in response to the weakening credit and market conditions in Kuwait over the past 12 months," Lotter adds.

KIPCO's debt-to-market value leverage was 16% at year-end 2008 (19% at 1H 2009), thus comfortably within Moody's 25% ceiling for the rating. Moody's takes comfort from the fact that KIPCO has actively managed its market value leverage by selling around $200m of core and non-core assets during turbulent market conditions in support of its credit profile.

KIPCO has also strengthened its liquidity over the past 12 months by repaying debt and extending debt maturities. The company now has no debt maturing before November 2010, and good additional coverage from $383m of cash and $172m of undrawn committed credit facilities at 1H 2009.

Whilst consolidated earnings have declined sharply, largely due to high provisions and investment losses at its core banking subsidiaries, dividend cash flow to KIPCO remained firm, with cash coverage of 5.6 times. However, dividends are likely to be lower for 2009 following Burgan Bank's decision not to pay a cash dividend this year. Moody's nonetheless expects KIPCO's cash coverage to be well above 3 times in 2009.

Ratings remain partially constrained by the credit quality of the underlying assets, given that Burgan Bank and United Gulf Bank (UGB) have Bank Financial Strength Ratings (BFSR) equivalent to Baa3 and Ba1, respectively, and both ratings are on negative outlook, reflecting still uncertain conditions in the region's banking sector. Accordingly, KIPCO's negative outlook reflects the negative outlooks at both Burgan Bank -- which was recently downgraded by one notch -- and UGB. Moody's highlights that any more substantial deterioration in credit quality of KIPCO's core subsidiaries would likely impact KIPCO's own ratings. Conversely, should ratings at either Burgan Bank or UGB stabilise over the medium term, KIPCO's own outlook would also likely return to stable.

KIPCO's four core subsidiaries, which in addition to Burgan Bank and UGB also include Gulf Insurance Company (GIC) and satellite TV broadcaster Showtime and Orbit, currently constitute approximately 78% of the company's asset base and represent 64% of KIPCO's cash flows, which also includes additional income from interest and securities.

Whilst Moody's assesses KIPCO purely on its stand-alone credit characteristics, we acknowledge that KIPCO's creditworthiness is strengthened by a supportive long term strategic shareholder, Al Futtooh Holding Company K.S.C. (AFI), which is the investment vehicle associated with the two sons of Kuwait's ruling Emir. AFI has been associated with the group since 1980, and has continued to increase its stake gradually from around 20% at inception to now beyond 50%, including participating in all rights issues of KIPCO.

Moody's expects the company to manage its future growth by maintaining its market value leverage below 25% and to maintain a solid dividend stream from controlled subsidiaries, so that its cash coverage from dividends remains more than 2 times at all times. Following its recent exit from telecoms, KIPCO is likely to continue to grow into new areas, either via green field start-ups or acquisitions. Moody's expects any such expansion to be executed in moderation and without materially impacting KIPCO's asset quality.

Moody's Baa1 ratings on KIPCO's $2bn EMTN Programme is based on the fact that Notes drawn under the Programme constitute senior unsecured obligations of KIPCO, which irrevocably and unconditionally guarantees all issuance under the Programme. The Programme includes a provision whereby a Restructuring constitutes a put event, which gives Noteholders the right of early redemption of the Notes. Such an event includes a reduction of AFI's shareholding in the company to below 30%. In the recently renewed EMTN Programme, KIPCO has successfully managed to remove the cross-default clauses with any of its subsidiaries.

Moody's last rating action on KIPCO was on 16th July 2008, when Moody's assigned first time Baa1 issuer ratings to the company with a stable outlook. Moody's rates KIPCO in accordance with its Global Rating Methodology for Investment Holding Companies, published in October 2007 which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating KIPCO can also be found in the Credit Policy & Methodologies directory.

Kuwait Projects Company Holding K.S.C. (KIPCO), headquartered in Kuwait, is a major investment holding company focusing on the Middle East and North Africa (Mena). It has an experienced management team that has been together for nearly two decades. With over 50 companies under the KIPCO Group, consolidated assets of $19bn, the company has a track record of 17 consecutive years of profitability. The group employs over 8000 people.