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Rating Action:

Moody's affirms KIPCO's Baa3/P-3 ratings and maintains negative outlook

05 Sep 2013

USD 1 billion of rated debt affected

Frankfurt am Main, September 05, 2013 -- Moody's Investors Service has today affirmed the Baa3 long-term issuer rating of Kuwait Projects Company (Holding) K.S.C. ("KIPCO") and the Baa3 debt instrument ratings on bonds, due in 2016 and 2020, issued by Kuwait Projects Co. (Cayman) under a $1 billion euro medium-term note (EMTN) programme, whose provisional (P)Baa3/(P)Prime-3 (P-3) ratings have also been affirmed. Concurrently, Moody's has affirmed KIPCO's P-3 short-term rating. The outlook on the ratings remains negative.

RATINGS RATIONALE

Moody's affirmation of KIPCO's Baa3 rating primarily reflects the company's stable market-value leverage (MVL) ratio of around 25%, its intention to monetise its media asset as well as shareholder support.

Moody's continues to recognise KIPCO as an investment holding company despite three of its largest investments (Burgan Bank SAK, United Gulf Bank, Gulf Insurance Co.), which together account for more than 50% of the value of investments, being clustered in the financial services industry. This high concentration is exacerbated by (i) the company's large single holding in the Panther Media Group Ltd (PMGL)/OSN media asset and sizable value contribution from the media segment and (ii) KIPCO's geographical focus on the Middle East and North Africa (MENA) region. This concentration means that KIPCO's rating is to some extent influenced by the credit risk of these larger holdings, not just the equity risk across its aggregate portfolio.

This concentration is to some extent offset by Moody's requirement that KIPCO maintains a more demanding MVL ratio (no higher than 25%) than the rating agency would normally expect of a Baa-rated investment holding company (25% - 35%; KIPCO's MVL was around 25% at financial year ended (FYE) 31 December 2012). KIPCO also has the ability to upstream higher dividends from some of its investments to strengthen its weak cash coverage. However, the company is yet to do this as it has ample liquidity at the parent level. In addition, KIPCO is currently considering monetising certain assets, including its media asset, which could unlock substantial value if placed in the market above Moody's most conservative valuation assumption for MVL purposes.

The rating affirmation also reflects that KIPCO continues to benefit from shareholder linkages with Kuwait's ruling family, which lift the company's rating to Baa3. Members of the family own the company's principal shareholder, Al Futtooh Holding (AFH), which in turn owns a 63% stake, of which 45% is direct. Specifically, the rating takes into account support given to KIPCO over time by AFH, which includes purchasing treasury shares over time and exercising flexibility in adjusting dividend payments. In addition, Moody's recognises that KIPCO's shareholding could provide it with access to support, either directly or indirectly, at the level of some of its investments, which is also factored into the Baa3 rating. Without this support, KIPCO's rating would likely be lower, given that the baseline credit assessment of its largest single holding, Burgan Bank, is ba1.

Moody's further notes that management has initiated a portfolio streamlining exercise, whereby the group is seeking to reduce complexity by transferring the direct control of some of its subsidiaries' investments to KIPCO, which will increase transparency. This transfer of direct ownership to KIPCO will also allow the company greater access to cash flow.

Furthermore, based on conservative valuation assumptions regarding the PMGL/OSN media asset, which we have taken at carrying value (KD 140 million, $497 million) in KIPCO's financial statements, the MVL metric has been hovering around the 25% threshold. Moody's recognises that a revaluation of this asset through a (partial) disposal or IPO could result in an MVL metric well below 25%.

Although KIPCO's cash coverage, one of the key metrics Moody's uses in assessing the financial strength of investment holding companies, remains very weak (1.2x at FYE 2012) for the rating category, the rating agency recognises the following mitigating factors, which provide management with time to address structural weakness at the level of its investments: (1) controlling stakes in liquid investments could be monetised and upstreamed as dividends; (2) equity value in KIPCO's pay TV operations -- a jointly owned company where KIPCO has 60.5% ownership -- could be unlocked through an IPO, dividend upstreaming or an outright sale; (3) the company has no significant debt maturities until 2016 (KD80 million ($284 million) of bank facilities in January 2016; $500 million of MTNs in October 2016). As a result of this debt maturity profile, KIPCO has a strong adjusted liquidity ratio.

RATIONALE FOR NEGATIVE OUTLOOK

The negative rating outlook reflects Moody's view that the rating is currently weakly positioned in its category. Moody's could stabilise the outlook if KIPCO completes an IPO of the PMGL/OSN media asset, as this would generate cash and support the valuation of any remaining stake. However, it could also be credit negative if those proceeds are immediately distributed through dividends, and if the company's resulting portfolio concentration is even higher than at present.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's expects that the operating performance of KIPCO's core investments will improve by 2015 and that these improvements will become visible in at least two forms: higher valuation and thus stronger MVL ratios and higher cash dividends and thus stronger cash coverage ratios.

Moody's could upgrade the ratings if (1) KIPCO's MVL metric decreases below 20% on a sustainable basis; (2) its cash coverage improves to well above 3.0x; and (3) its liquidity ratios remain strong, with management addressing upcoming debt maturities well in advance. However, an upgrade is unlikely while the portfolio retains its current concentration on weakened regional financial services assets.

Conversely, Moody's could downgrade the ratings if (1) KIPCO's MVL metric rises to above 25% on a continuing basis; (2) its cash coverage remains between 1.0x and 2.0x; (3) the company's portfolio concentration becomes more material, and/or credit quality of its core holdings weakens; and (4) its liquidity ratios deteriorate because of upcoming debt maturities.

PRINCIPAL METHODOLOGY

The principal methodology used in rating was the Global Investment Holding Companies Industry Methodology, published October 2007. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

KIPCO is a Kuwait-based investment holding company with investments in Kuwait, the Gulf Cooperation Council (GCC) countries and across the Middle East and Northern Africa (MENA) region. The company's most significant assets by value are Burgan Bank, United Gulf Bank and Panther Media Group Ltd (OSN media asset).

The Local Market analyst for this rating is Martin Kohlhase, 971.4.237.9544.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Alex Verbov
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms KIPCO's Baa3/P-3 ratings and maintains negative outlook
No Related Data.
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