Capital Standards Rating Co. (CSR) assigned a first time provisional bond rating of BBB+(pr) to the proposed KD-denominated bond issuance of Kuwait Projects Company (Holding) 'KIPCO'. On the national scale, the rating is A+(pr)kw reflecting the credit quality of the issue relative to other local issues. The outlook for the rating is stable.
The proposed bond of up to KWD 80 mn would rank equally with any present or future unsecured obligations of KIPCO. The issue structure and pricing of the proposed issuance have yet to be finalized. The tenure of the bond issue would be between 3 to 7 years. The purpose of the bond issuance is to primarily diversify its funding sources, and take advantage of the untapped appetite of the local market.
The assigned rating is provisional (identified by the modifier "(pr)" added to the credit rating) and reflects CSR's preliminary credit opinion only. The provisional bond rating is subject to further review based on the terms & conditions set forth in the final prospectus or term sheet of the bond to be issued.
The rating reflects KIPCO's strong ability to service its debt with good liquidity position and, the prudent and active approach to managing its funding profile. The rating is also supported by the company's overall corporate governance framework and strong ownership structure. KIPCO's debt levels are considered modest and appropriate for the rating. The company's overall debt profile is unsecured in nature and has a staggered maturity, supporting the bond issue rating. However, CSR notes the structural subordination aspect of KIPCO's corporate debt relative to the debt of its core subsidiaries. The rating is constrained by the company's concentrated investment portfolio, and the subdued performance of its core subsidiaries due to challenging operating environment. This is reflected in the deterioration of KIPCO's fundamentals, thereby exposing the company's cash flows to volatile investment income.
KIPCO is an 'operating' holding company enabling it to hold controlling stakes, and influence the operational and financial policies of its core subsidiaries. However, the investment portfolio constitutes a few large holdings, reducing portfolio diversification. Even though CSR considers the average credit quality of the overall portfolio to be investment grade, the tough operating environment has restrained the financial performance of the subsidiaries limiting cash flows to KIPCO.
Dividend income, which has been the major contributor to KIPCO's cash flows historically, has witnessed a significant decline in FY 2010. This resulted in the deterioration of the interest coverage ratio to 0.77x in FY 2010. Nevertheless, the company's total core cash flows, although inherently uncertain due to sale of investments, were able to support the interest expense with a coverage ratio of 2.61x in FY 2010. CSR notes that KIPCO has demonstrated a consistent ability to generate sufficient cash flows from sale of its subsidiaries & associates in the last five years.
CSR views KIPCO's overall liquidity profile as strong, strengthening the financial flexibility of the company. This opinion is based on the company's relatively liquid balance sheet, and the well-laddered maturities of its financial obligations. In addition, KIPCO has modest levels of debt with market value leverage of 22% as of FY 2010. Even after the proposed bond issuance, CSR believes that the market value leverage would be within the range of 25% - 30%, which is appropriate for the rating. CSR, however, notes that in the medium term KIPCO will have significant debt maturing. While KIPCO has a prudent funding policy, the company is reliant on refinancing and strategic sale of assets to pay off its debt. This strategy does add a level of uncertainty and inherent risk especially during depressed economic cycles.
The outlook for KIPCO's rating is stable. The liquidity position and the funding capacity are sufficient for KIPCO to service its debt in the next 2-3 years, and significantly reduce short term refinancing risks. The cash flows are expected to be volatile, however, given KIPCO's commitment to its financial discipline, CSR believes that the company will most likely maintain its leverage and coverage ratios appropriate to the rating. The rating could be downgraded if there is a sustained deterioration in the credit quality of its core subsidiaries. In addition, significant deterioration in KIPCO's fundamentals, especially its coverage and leverage ratios, could have an unfavorable impact on either the rating or the outlook of the company.
The rating methodologies used in this rating are "Investment House" and "Corporate Debt", and it can be found at www.capstandards.com in the 'Methodologies Brief' sub-directory under the Rating tab. Kuwait Projects Company (Holding) "KIPCO" is one of the largest investment holding companies with investments spanning the GCC and the MENA region. The company currently has direct and indirect stakes in more than 70 companies (subsidiaries and associates) across 26 countries. Through its core holdings, KIPCO mainly operates in the financial sector (commercial banking and investment banking), insurance, media, real estate and industrials. The company, which is listed on the Kuwait Stock Exchange, is largely held by the members of the Kuwaiti royal family.
Additional information is available at www.capstandards.com.
A detailed Credit Opinion Report, explaining the key rating considerations along with an in-depth financial analysis, is available for CSR's subscribers.
-Ends-
© Press Release 2011
