Kuwait: Moody’s affirms KIPCO ratings, cuts outlook to negative

Moody's Investors Service has affirmed the Baa1 long term and Prime-2 short term issuer ratings of Kuwait Projects Company Holding K.S.C. (KIPCO), but changed its outlook to ‘negative’ from ‘stable’, reflecting deterioration in the credit quality of some of its core subsidiaries.
KIPCO is a major investment holding company focusing on the Middle East and North Africa (MENA) with over 50 companies, consolidated assets of US$19 bln, a track record of 17 consecutive years of profitability and more than 8000 employees.
"KIPCO has responded well to a challenging global and local market environment by strengthening liquidity and actively managing leverage in support of credit metrics", said Philipp Lotter, Senior Vice President at Moody's in Dubai. "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 added.
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 USD 200 mln 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 USD 383 mln of cash and USD 172 mln 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.
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.
KIPCO's four core subsidiaries, which include Gulf Insurance Company (GIC) and satellite TV broadcaster Showtime and Orbit, currently constitute 78% of the company's asset base and represent 64% of cash flows.
Moody's acknowledges 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 controlling beyond 50%.
Following its recent exit from telecoms, KIPCO is likely to continue to grow into new areas, either via green field start-ups or acquisitions and Moody's expects such expansions to be executed in moderation and without materially impacting KIPCO's asset quality.