LONDON, June 24: Moody’s Investors Service has today downgraded to Baa3 from Baa2 the long-term issuer rating of Kuwait Projects Company (Holding) K.S.C. (“KIPCO”) and the 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. Concurrently, Moody’s has affirmed KIPCO’s Prime-3 short-term rating. Today’s rating action concludes the review for possible downgrade initiated on April 12, 2011. The outlook on the long- and short-term ratings is negative.
The downgrade to Baa3 from Baa2 reflects a weaker cash coverage ratio that has deteriorated on the back of lower dividend income and higher interest costs. Moody’s however notes that access to other sources of cash income, e.g. fee income (which amounted to $85 million in 2010) and cash income from disposals ($80 million), although more volatile and less predictable by nature, improve the cash coverage ratio when included.

In addition, Moody’s is concerned that the underlying operating and financial performance trends of KIPCO’s key investments such as Burgan Bank and OSN, may not be sufficient to lead to a significant increase in dividend payments, thereby bolstering KIPCO’s dividend income and consequently its cash coverage ratio.
At the same time, KIPCO will generate less interest income as a result of holding a lower amount of cash of ca. USD365 million as at 31st May 2011 after the repayment of ca$600 million of debt made in the year to May 2011
However, the positive impact of the expected reduction in interest paid through the retirement of relatively low-cost short-term debt is seen to be an offsetting positive development.

Threshold
Moody’s notes that KIPCO’s market-value leverage (MVL), at 23% as of financial year-end 2010, remained below the threshold that Moody’s previously stated could lead to a downgrade of the rating — 25%. MVL — based on the book value for KIPCO’s media assets (KD 197m segmental assets) — could improve were a range of higher valuation estimates such as transaction multiples for the media assets used.

KIPCO has termed out its debt with two issuances under its EMTN programme — maturing in 2016 and 2020, respectively — which has alleviated its short-term refinancing issues. KIPCO’s next sizable maturity (a bilateral loan of KD 40 million/approximately $140 million) comes due in August 2014.
The negative outlook reflects the downside risk for the ratings over the coming 12-18 months if KIPCO is unable to continue strengthening its overall financial profile such that its cash coverage falls to below 2.0x or if its MVL moves above 25%. On the basis of a broader approach, i.e. including other cash income sources besides dividend and interest income, the Baa3 and the Prime-3 ratings assume that KIPCO’s cash coverage ratio will improve towards 3.0x and also incorporate headroom for valuation fluctuations for unlisted assets.

The principal methodology used in rating Kuwait Projects Company (Holding) K.S.C. was the Global Investment Holding Companies Industry Methodology, published October 2007.
Kuwait Projects Company Holding K.S.C. (KIPCO) is a major investment holding company based in Kuwait, focusing on the Middle East and North Africa (MENA). It has total portfolio assets at the parent of around $3.9 billion at 31st December 2010, as well as direct and indirect investments in over 70 companies from the financial institutions, industrials, media and real estate sectors across 16 MENA countries.
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