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Rating Action:

Moody's changes outlook on GIC's Baa2/D- ratings to stable from negative

05 Jul 2010

Limassol, July 05, 2010 -- Moody's Investors Service has today changed to stable from negative the outlook on the D- stand-alone financial strength rating (BFSR) on Gulf Investment Corporation (GIC). As a result, the outlook on the company's Baa2 deposit and senior unsecured debt ratings was also changed to stable from negative.

Moody's decision to change the outlook reflects GIC's strengthened capital position and reduced leverage, subsequent to (1) its recapitalisation in 2009; (2) the managed balance sheet contraction; and (3) the relative stabilisation and partial upturn in global markets since H2 2009, allowing GIC to reverse some of its sizable 2008 mark-to-mark losses and realise gains on the disposal of some of its riskier assets.

The rating agency also observes that GIC has expressed its intent to refocus on its original strategic objective of promoting economic development in the GCC region. As a result, and with the assistance of external advisors, GIC has been modifying its asset composition, thereby increasing its exposure to Projects and Equity participations (viewed as core), while reducing its exposures to asset classes in which it lacks in-house expertise to manage. Although the company's legacy Structured Investment Vehicles (SIVs) workout portfolio remains a sizable portion of its assets, the bulk of residual assets in this portfolio is highly-rated.

GIC's BCA of 13 reflects the company's (1) narrow scope of operations; (2) its lack of a sizeable franchise; (3) the potentially elevated risk of its operations, as reflected in the multiple performance setbacks suffered since the onset of the sub-prime crisis in mid-2007; and (4) the likelihood of increasing income volatility as the company revises its strategy towards principal investments (whose returns are bulky and temporally inconsistent).

Although the company ostensibly bears high refinancing risk as it remains predominantly market-funded with material asset vs. liability maturity mismatches, GIC's ratings reflect that such risks are alleviated by an acceptable stock of repo-able securities and importantly access to highly stable (although contractually typically short-term) deposits from GCC governments and government agencies. Barring unforeseen and enduring market unrest, Moody's does not expect GIC to face difficulties in continuing to use its securities portfolio for repo funding purposes.

In accordance with Moody's rating methodology for government-related issuers (GRIs), GIC's Baa2/Prime-2 long- and short-term deposit and issuer ratings and its Baa2 senior unsecured debt rating reflect the following inputs: (i) GIC's BCA of 13; (ii) the Aa2 local currency bond rating (negative outlook) of the Kuwaiti government; (iii) medium dependence; and (iv) a very high probability of support.

Although GIC is jointly owned by the six GCC countries (holding equal stakes), its ratings currently incorporate Moody's assessment of the probability of support from the government of Kuwait, where the company is established and which, in case of need, would be its first source of timely support. Nevertheless, the rating agency believes that the Kuwaiti authorities' willingness to extend support to GIC is not limitless and would be influenced by the willingness of other GCC countries to match Kuwaiti efforts. Despite delays by some countries in paying up their share of the USD1.1 billion authorised capital, shareholder support has been in evidence over the 2008-2009 period. In addition, given the shareholders' public declarations of support, Moody's continues to view the probability of systemic support for GIC as very high as it believes that the reputation risks of failing to provide support and the connotations that this could have in terms of pan-GCC cooperation outweigh the aforementioned concerns.

Moody's previous rating action on GIC was implemented on 24 November 2009, when Moody's concluded a review of the company's ratings by lowering its BCA to 13 from 12 and affirming its long-term, issuer and deposit ratings to Baa2/Prime 2. At the time, all ratings were assigned a negative outlook.

The principal methodologies used in rating GIC are (i) "Application of Joint Default Analysis to Government-Related Issuers" (April 2005); and (ii) "Revised Methodology for Government-Related Non-Bank Financial Institutions" (August 2006). Elements of Moody's "Bank Financial Strength Ratings: Global Methodology" and "Global securities industry methodology" were also used in rating GIC. All these rating methodologies are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating the company can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Kuwait City, Gulf Investment Corporation reported total assets of USD6.11 billion at YE2009.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Stathis A. Kyriakides, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on GIC's Baa2/D- ratings to stable from negative
No Related Data.
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