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Rating Action:

Moody's affirms Gulf Investment Corporation's A2 rating, outlook stable

27 Nov 2018

Singapore, November 27, 2018 -- Moody's Investors Service has today affirmed the long-term issuer and senior unsecured MTN rating of Gulf Investment Corporation G.S.C. (GIC) at A2/(P)A2. The outlook remains stable.

The affirmation of the A2 rating balances lower leverage and a continuing strong capital position against the higher risk associated with the GIC's equity investment model, including in illiquid stakes, the corporation's ongoing reliance on wholesale deposits as a source of funding, and the decline, albeit modest, in shareholders' ability to support the institution.

The decision to maintain the stable outlook reflects Moody's assessment of the institution's robust risk management function that will contribute to broadly stable credit metrics through potential shocks. In particular, GIC's track record of profitability, which Moody's expects to continue, points to the corporation's ability to preserve capital.

In addition, Moody's has affirmed GIC's short-term issuer rating at P-1. Moody's has also affirmed the (P)A2 senior unsecured MTN programme rating of GIC Funding Limited, which is a fully-owned special purpose vehicle of GIC whose obligations are guaranteed by GIC and rank pari passu with GIC's other unsecured obligations. GIC Funding Limited's outlook also remains stable.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE A2 RATING

LOWER AND MODEST LEVERAGE AND STRONG CAPITAL POSITION MITIGATE INHERENTLY HIGHER RISK BUSINESS MODEL

Since 2008, GIC has deleveraged its balance sheet, winding down the assets of its asset management arm in favour of a renewed operational focus on its equity investment portfolio. Moody's expects GIC's leverage to be broadly stable, at the current low levels. Low leverage mitigates the relatively higher risk of the corporation's operations, compared with other Multilateral Development Banks (MDBs), related to its focus on equity investments, including large and illiquid stakes.

GIC's total borrowings fell to just $0.8 billion as of 2017 from $4.2 billion in 2007, while total assets declined to $4.2 billion from $9.2 billion during the same period. The reduction in debt on GIC's balance sheet has supported improvements in leverage and capital adequacy ratios: debt/equity declined to 31% as of end-2017 from 52% three years earlier, while GIC's asset coverage ratio (ACR, which Moody's measures as the ratio of usable equity over operational assets and expected loss on treasury assets) increased to 120% from 98%.

Low leverage and very high asset coverage mitigate the risk on GIC's balance sheet derived from the corporation's business model. GIC's equity investments, which comprise an increasing share of its assets, are more susceptible to large losses than loans to governments that generally account for a large part of MDBs' operations. Furthermore, as GIC's investments are mainly in unlisted companies, and the typical holding period is usually multi-year, in some instances extends over a decade, GIC's balance sheet is highly illiquid. Given the nature of these investments, the timing of future payoffs is also highly uncertain.

RELIANCE ON DEPOSITS IN FUNDING REMAINS AND WEIGHS ON LIQUIDITY

GIC's reliance on wholesale deposits for funding is unusual for a multilateral development bank. The short-term nature of deposits and potential for withdrawals weighs on Moody's assessment of GIC's liquidity. Of the few multilateral development banks rated by Moody's that take deposits, GIC is among the most reliant on wholesale deposits for funding, with deposits accounting for 36% of total liabilities in 2017 and 31% on average in the past five years.

The deposit base has shifted in composition over recent years, but it remains primarily comprised of deposits from central banks, regional sovereign wealth funds and government-related entities such as national oil companies and social security funds. The contractual maturity of the deposits is short, although some of the institutional deposits such as those from multilateral development banks and regional central banks are longstanding. Such reliance on deposits partly offsets GIC's very high coverage by liquid assets of short-term debt.

SHAREHOLDERS' ABILITY TO SUPPORT THE GIC HAS DECLINED IN RECENT YEARS, ALBEIT MODESTLY

GIC is the only financial institution established under the Gulf Cooperation Council (GCC), and its shareholders comprise the six GCC sovereigns, each of whom hold an equal share of 16.7% of paid-in capital.

The shareholders have not reinstated callable capital since the 2008 call. As a result, potential shareholder support would be in the form of non-contractual support. Although GIC's median shareholder rating is high compared to other MDBs, the period of lower oil prices since 2015 has strained the fiscal and external strength of some shareholders, leading to sovereign rating downgrades in Saudi Arabia, Oman, Qatar and Bahrain. Lower sovereign ratings for some shareholders is an indication that their ability to provide extraordinary support in the event that it was required by GIC is now somewhat weaker than in the first half of the decade.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's assessment of the institution's robust risk management function that will contribute to broadly stable credit metrics through potential shocks. In particular, the GIC has a track record of profitability. GIC has consistently posted positive returns averaging 2.4% over average assets over the past decade, which has allowed it to repair the capital erosion caused by severe losses from its asset management arm in 2008. Moody's expects GIC's profitability to continue to support its capital adequacy profile.

WHAT COULD CHANGE THE RATING UP

Moody's would likely upgrade the rating if there was evidence of materially stronger shareholder support, including the re-introduction of sizeable callable capital.

Over time, evidence that, despite the riskier nature of its operations, GIC is able to preserve its capital, including through economic and financial shocks in the countries it takes equity stakes in would also point to upward pressure on the rating.

WHAT COULD CHANGE THE RATING DOWN

A renewed and marked increase in leverage would likely prompt a downgrade. Indications of weakening shareholder support, for example as a result of an escalation of the diplomatic rift within the GCC undermining commitment to regional institutions such as GIC, or a deterioration in the creditworthiness of some key shareholders and their ability to support, could also prompt Moody's to downgrade the rating.

Downward pressure on GIC's rating would also result from significant investment losses that lead to an erosion of capital adequacy.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for these ratings is Thaddeus Best, +971 (423) 795-06.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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