Markaz’s 5-Year Senior Unsecured Bond – ‘BBB’ Issue Rating Affirmed with a Stable Outlook

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Kuwait City, Dec 25: Kuwait Financial Centre “Markaz” announced that Capital Intelligence Ratings has affirmed the ‘BBB’ issue rating assigned to Markaz’s KWD35mn 5-Year Senior Unsecured Bond. The Outlook on the rating remains Stable.

The issue rating is driven by Markaz’s general creditworthiness. The latter is reflected by the company’s resilient financial metrics in terms of both liquidity and debt, especially as at end-October 2023, given the significant lowering of bank borrowings and moderate leverage. Other supporting factors are the high level of unencumbered assets and the maintenance of substantial funding lines. The rating also reflects the company’s well-established franchise and good reputation in the region, especially in Kuwait. Markaz’s experienced management team is well equipped to continue to effectively navigate the company through the current subdued financial markets.

Markaz has a long-standing reputation as a leading fund manager in Kuwait. Despite some falls in stock values in line with the movement of the financial markets, its holdings of financial investments continued to account for more than half of the asset base as at end H1 2023. A large proportion of these investments were in Kuwait, with some concentration towards financial institutions and the real estate sector. That said, a large proportion of these financial investments relates to funds and portfolios that the company manages. The overall portfolio is also fairly liquid as reflected by the high proportion of level 1 and 2 fair value hierarchy investments. As these investments are classified as FVTPL, they will continue to expose the company to the potential financial market volatility.

Over recent years, the company has built up a book of investment properties and investments in various real estate sector projects in the GCC, the US and Europe. However, given subdued financial markets combined with better real estate market conditions, especially in the GCC region, the company started disposing of several properties in 2022 and H1 2023. Together with the deconsolidation of a real estate fund, investment properties as an asset class dropped to 12.9% of total assets as at end H1 2023, down from over a third at end-2022. Properties previously held as ‘assets for sale’ were subsequently largely sold. The other significant asset class relates to Markaz’s investment in associates. This largely consisted of two funds (including the deconsolidated real estate fund) managed by the company.

Overall, Markaz’s assets are well spread geographically. The company’s assets are funded by equity and what remains a moderate level of borrowings. Expansion of the equity base has been largely through the retention of earnings. However, total equity contracted in recent periods as dividend payments and negative changes relating to the drop in ownerships of subsidiaries outpaced earnings. The payout ratio was significantly higher in 2022 compared to a year earlier. Internal capital generation is likely to remain weak given the company’s generous dividend payment policy.

Markaz has maintained its track record of debt servicing and repayments in both 2022 and H1 20233 through effective cash flow management and a good level of liquidity, as well as substantial unutilized but committed lines. Refinancing risk is considered moderately low given the company’s good access to the capital markets; this is also supported by its well-established franchise, good market reputation, and the high level of unencumbered assets.

The company continues to exhibit good liquidity metrics given the large portfolio of quoted securities and managed funds, and a sound level of cash and deposits. Furthermore, the asset and liability mismatch position was largely positive. Markaz remained well in compliance with the Central Bank of Kuwait’s (CBK) financial requirements relating to liquidity and leverage at end H1 2023.

Markaz’s AUM business recovered further in 2022 and H1 2023. The largest proportion relates to funds and portfolios, followed by real estate investments. The bulk of AUM was in the GCC and over a third relates to the Kuwait Investment Authority. Fee and management income grew in 2022 but fell again in H1 2023, reflecting subdued financial market performance. Other recurring income relating to dividend and interest income remained fairly limited. Nonetheless, these recurring revenues continued to form over two thirds of operating income, supporting the fairly good quality of earnings.  

The Stable Outlook indicates that the issue rating is likely to remain unchanged over the next 12 months. The outlook balances challenges relating to the effect of financial markets volatility against the Markaz’s generally sound financial standing, solid liquidity, and well-established franchise and market reputation.

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