Credit Opinion: Kuwait Projects Company (Holding) K.S.C. Global Credit Research - 14 Oct 2015 Kuwait

Ratings Category

Moody's Rating

Outlook Issuer Rating ST Issuer Rating

Stable Baa3 P-3

Kuwait Projects Co. (Cayman)

Outlook Bkd Senior Unsecured Bkd Other Short Term

Stable Baa3 (P)P-3

Contacts Analyst

Phone

Jeanine Arnold/Frankfurt am Main 49.69.707.30.700 Rehan Akbar/DIFC - Dubai 9714.237.9565 Martin Kohlhase/Frankfurt am Main 49.69.707.30.700 David G. Staples/DIFC - Dubai 971.42.37.9536

Key Indicators [1]Kuwait Projects Company (Holding) K.S.C. Estimated Portfolio Value (USD bn) Market value leverage (MVL) [2] Cash Interest coverage Adj. liquidity ratio [3] Asset concentration

2010 4.0 22.0% 0.8x 5.2x 75.0%

2011 3.2 25.9% 0.3x n.m. 76.7%

2012 3.5 22.1% 1.2x n.m. 72.1%

2013 3.7 24.6% 0.9x n.m. 72.1%

2014 4.1 24.0% 1.0x n.m. 72.7%

[1] Based on parent level financials [2] Using $1.5 billion as fair value for OSN which was calculated in 2009 at the time of Showtime Arabia and Orbit merger [3] n.m. as no (significant) short-term debt

Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.

Opinion Corporate Profile KIPCO is a Kuwait-based investment holding company with investments in Kuwait, the Gulf Cooperation Council (GCC) countries and across the Middle East and North 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). Almost all of the activities of investees are located in the MENA region. KIPCO's principal shareholder is Al Futtooh Holding (AFH), a company owned by members of Kuwait's ruling family, which holds a 65% stake in the company, of which 45% is direct.

Rating Drivers - Market-value based leverage (MVL) expected to remain below 25%. - Supportive shareholder through Al Futtooh Holding (AFH), an investment vehicle associated with members of Kuwait's ruling family. - High investment concentration with top three investments comprising more than 70% of the portfolio value. - Historically weak cash interest coverage which is expected to gradually improve but nevertheless is likely to remain weak relative to investment grade peers.

SUMMARY RATING RATIONALE KIPCO's Baa3 ratings reflect (1) a relatively stable MVL metric that has remained largely range-bound between 20%-25%; (2) steady improvements in the financial performance of KIPCO's holding in the Panther Media Group Ltd (OSN) media asset, which reported a net profit in 2013 for the first time since inception; (3) the historical track record of maintaining a strong liquidity profile with ca. $967 million in cash at parent level as of end-June 2015 and the propensity to actively pre-fund debt maturities to remove refinancing risk; and (4) shareholder linkages with Kuwait's ruling family. The ratings also reflect (1) the concentration of assets in the financial services industry, making up ca. 55% of the KIPCO's portfolio value and OSN making up another ca. 20%; (2) a weak cash coverage ratio relative to similarly rated peers; and (3) the geographical concentration in MENA, with heightened geopolitical and macroeconomic risks. The concentration risk means that KIPCO's rating is not only influenced by the equity risk across its aggregate portfolio, but could be adversely impacted should credit risk of the larger holdings materially deteriorate.

DETAILED RATING CONSIDERATIONS RELATIVELY STABLE MVL METRIC WITH POTENTIAL FOR HIGHER OSN VALUATION The majority of KIPCO's investments are publicly quoted and hence a current market valuation can be easily obtained. These valuations are based on KIPCO's direct stakes in these companies. The exception is OSN, a jointly owned company in which KIPCO owns 60.5% and where depending on the valuation assumptions used, our market value-based leverage (MVL, as measured by net debt to estimated investment portfolio value) metric would vary. Under a conservative assumption using OSN's book value of equity reported in KIPCO's financial statement ($770 million for KIPCO's stake), we estimate MVL to be 24.8% as of 2014YE, while using the fair value calculated in 2009 at the time of the Showtime Arabia and Orbit merger results in a MVL of 24% (A for Market Value Leverage factor). In August 2014, OSN's shareholders rejected a $2.4 billion cash (with a further $800 million earn-out provision) unbinding offer for 100% of OSN from a private equity firm. We note that MVL would stand at 21.2% as of 2014YE if the $2.4 billion cash purchase price is used to value OSN but also recognize the challenges in valuing unlisted investments. IMPROVEMENT IN OSN PERFORMANCE RESULTING IN DIVIDEND PAYMENT FOR THE FIRST TIME IN 2013 The financial performance of KIPCO's holding in OSN media asset has been improving since the merger in 2009. The number of subscribers have increased by 55% since 2012 while revenues increased by 24% since 2013. OSN reported a net profit for the first time in 2013 (KWD10.4 million) and 2014 results have been stronger (KWD 18.1 million). Although OSN paid a cash dividend to its shareholder in 2013 but not in 2014, we believe that OSN has the potential to provide regular dividends to its shareholders over the medium term. In addition, we understand that the company has low leverage - this provides financial flexibility to shareholders if needed. INVESTMENTS HIGHLY CONCENTRATED BY ASSET AND INDUSTRY KIPCO's assets are highly concentrated around investments in the financial services industry (Burgan Bank, United Gulf Bank, Gulf Insurance Company) and the Middle East (Ba for business diversity sub-factor). The three most significant investments make up more than 70% of the portfolio's total value (Ba for asset concentration subfactor). More than 60% of the underlying investment revenues and assets are based in Kuwait and other countries of the Gulf Cooperation Council (GCC) and another 30% in other countries of the MENA region (sub-factor Ba for geographic diversity).

WEAK CASH COVERAGE REFLECTS STRUCTURAL WEAKNESS AT INVESTEES, WHICH KIPCO IS ADDRESSING We believe that the low absolute cash dividend payout of KIPCO's investments is a structural weakness as it results in low cash income and consequently a weak cash interest coverage ratio (measured as the sum of dividend and interest received to interest paid at the holding level). For financial year 2014, UGB did not distribute any dividends (which has been the case since 2009, except an in kind dividend in FY2012), while Burgan Bank distributed dividends lower than in 2012 and 2013. On the other hand, OSN paid dividends for the first time since inception in 2013, confirming the positive performance that the media business has achieved over the last few years. Meanwhile, dividends from United Real Estate Company and United Industries Company have varied in previous years. In total, the investment portfolio paid out $107 million in dividends for 2014 versus $89 million in 2013. We note that a number of KIPCO's investments remain in a growth stage and rather than distributing dividends, they have been redeploying operational cash flows into the businesses themselves. However, we expect that management will use various levers to upstream cash to the holding level should there be a need - for instance through special dividends if the holding company is facing refinancing risk. We also anticipate that management will continue to streamline its portfolio, where possible, in order to reduce group complexity and cross-holdings. In the past, the group had transferred the direct control of some of its subsidiaries' investments to the holding level, which increased transparency and gave the holding company greater access to cash flows. RATINGS BENEFIT FROM SHAREHOLDER SUPPORT KIPCO continues to benefit from shareholder linkages with Kuwait's ruling family, which is taken into account for the company's Baa3 rating. Members of the family own the company's principal shareholder, Al Futtooh Holding (AFH), which in turn owns a 65% stake in KIPCO of which 45% is direct. Specifically, the rating takes into account support given to KIPCO by AFH, which includes purchasing treasury shares over time and exercising flexibility in adjusting dividend payments. In addition, we recognise that KIPCO's shareholders 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 rating.

Liquidity Profile LIQUIDITY RATIOS POINT TOWARDS A MIXED PICTURE KIPCO's liquidity ratios reflect a mixed picture: the adjusted liquidity ratio is strong, reflecting the extended debt maturity profile as the company does not face any significant debt maturities until January 2016 while current cash can meet all debt obligations until end of 2018 (Aaa for Adjusted Liquidity Ratio sub-factor). However, cash coverage at 1.0x as of FYE 2014 is weak, as the dividend income generated from underlying investments is low relative to the high cost of debt (B for Interest Coverage sub-factor), but is mitigated by the pre-funding of upcoming maturities. This pre-funding removes to a large extent refinancing risk and has also allowed KIPCO to lock in low interest rates, which should over time reduce the interest burden. KIPCO's 5-year notes maturing in 2019 pay 4.8% interest compared with 8.9% for the 7-year notes maturing in 2016. ADJUSTED LIQUIDITY RATIO STRONG AS NO IMMEDIATE DEBT MATURITIES KIPCO at the holding level has a strong liquidity position, with $967 million of cash as of end-June 2015 which easily covers its operating and financing cash flows. We assume that operating costs (rent, personnel, other overhead such as legal costs) at the holding level are moderate but interest paid in 2014 amounted to $117 million. Gross debt stood at $1.9 billion as of end-June 2015 and two debt instruments mature over the course of 2016: a dual-tranche KWD80 million ($262 million) debt facility in January and $500 million bond due in October (which was pre-financed by the $500 million issuance in February 2014). CASH COVERAGE REMAINS WEAK FOR THE RATING CATEGORY Cash coverage at 1.0x is weak for KIPCO's rating category. This reflects low dividend income with the primary source being Burgan Bank, but also high interest expense reflecting three $500 million bonds with a combined annual interest expense of approximately $115 million. Interest expense will remain elevated in 2015 due to the additional debt (ear-marked for repayment of debt maturing in 2016), and will start to decline from 2016 onwards due to the lower cost of debt on KIPCO's most recent bond issuance. We recognise that KIPCO could exercise its control over some investments by upstreaming higher dividend payments. The company has so far refrained from

doing so as it retains ample liquidity at the parent level and opts to maintain financial flexibility. We expect that this ratio will remain weak and constrain upward rating pressure.

Rating Outlook The stable outlook reflects financial performance improvements and the pre-funding of upcoming debt maturities.

What Could Change the Rating - Up We 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 investment concentration and in the absence of the portfolio providing the holding company with a regular diversified dividend income stream.

What Could Change the Rating - Down We could downgrade the ratings if (1) KIPCO's MVL metric rises to above 25% on a continuing basis; (2) the company's portfolio concentration becomes more material, and/or credit quality of its core holdings weakens; and (3) its liquidity ratios deteriorate because of upcoming debt maturities. Ratings could also be downgraded if KIPCO's cash coverage ratio remains between 1.0x and 2.0x (whilst being offset by adequate liquidity at the parent level to address debt servicing needs), or its cash coverage ratio is less than 3.0x in the absence of adequate liquidity at the parent level.

Rating Factors Kuwait Projects Company (Holding) K.S.C.

Global Investment Holding Companies Current LTM 6/30/2015 Industry Grid [1][2] Factor 1: Asset Quality (30%) Measure Score

a) Asset Concentration b) Geographic Diversity c) Business Diversity

[3]Moody's 12-18 Month Forward ViewAs of 10/9/2015 Measure Score

Ba Ba Ba

Ba Ba Ba

Ba Ba Ba

Ba Ba Ba

15.5

A

15.5

A

A

A

A

A

B

B

B

B

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Aaa

Factor 2:Management Discipline & Group Transparency (10%)

a) Management Discipline and Group Transparency Factor 3: Market Valued Based Leverage (20%) [1][2]

a) Portfolio Assets Market Value Leverage Factor 4: Cash Coverage (10%) [1][2] a) Interest Coverage Factor 5: Liquidity (15%) [1][2] a) Degree of Influence over Dividends of Investee b) Adjusted Liquidity Ratio Factor 6: Portfolio Risk (15%) [1][2] a) Portfolio Volatility Adjusted Leverage Rating:

a) Indicated Rating from Grid b) Actual Rating Assigned

A3 Baa3

A3 Baa3

[1] Based on parent level financials [2] As of 6/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating action information and rating history.

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