Credit Opinion: Kuwait Projects Company (Holding) K.S.C. Global Credit Research - 02 Oct 2014 Kuwait

Ratings Category

Outlook Issuer Rating ST Issuer Rating

Moody's Rating

Stable Baa3 P-3

Kuwait Projects Co. (Cayman)

Outlook Bkd Senior Unsecured Bkd Other Short Term

Stable Baa3 (P)P-3

Contacts Analyst

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

Phone

49.69.707.30.700 9714.237.9565 971.42.37.9536

Key Indicators Kuwait Projects Company (Holding) K.S.C. 31-Dec-09 Financial year ending [1] 20.6% Market value leverage 3.7x Cash coverage 12.5x Adj. liquidity ratio [2] 77.7% Asset concentration

31-Dec-10 23.2% 0.8x 5.2x 73.7%

31-Dec-11 27.8% 0.3x n.m. 75.2%

31-Dec-12 25.1% 1.2x n.m. 68.0%

31-Dec-13 23.9% 0.9x n.m. 71.0%

[1] All ratios are calculated using Moody's Standard Adjustments [2] 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 63% stake in the company, of which 45% is direct.

Rating Drivers

- Geographical and industry concentration. Investments in the financial services industry account for ca. 60% of the portfolio's value and the majority of investees are focussed on the MENA region. - Market-value based leverage (MVL) expected to remain below 25%. - Dividend income received by KIPCO, the holding company. Cash coverage (0.9x at FYE 2013) is weak and could be strengthened by higher dividend income and/or lower interest paid. - Shareholder support. Al Futtooh Holding (AFH), an investment vehicle associated with members of Kuwait's ruling family, owns 43% of the capital directly and has been supportive in the past.

SUMMARY RATING RATIONALE KIPCO's Baa3 ratings reflect (1) improvements to the company's MVL metric, that has dropped to 23.9% (versus 25% at fiscal year ended 2012) because of the higher valuation of its traded equity investments; (2) improvements in the financial performance of KIPCO's holding in the Panther Media Group Ltd (PMGL)/OSN media asset, which reported a net profit in 2013 for the first time since inception; (3) the strong liquidity profile with ca. $1 billion in cash at parent level and the active pre-funding that removes refinancing risk; and (4) shareholder linkages with Kuwait's ruling family, which lift the company's rating to Baa3. The ratings also reflect (1) the concentration of assets in the financial services industry, making up ca. 60% of the KIPCO's portfolio value and a media asset (PMGL/OSN) making up another 16.5%; (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 influenced by the credit risk of the larger holdings, not just the equity risk across its aggregate portfolio.

DETAILED RATING CONSIDERATIONS IMPROVING MVL METRIC TO 23.9% FROM 25%, BUT RELIANT ON OSN VALUATION ASSUMPTIONS 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 PMGL/OSN, a jointly owned company in which KIPCO owns 60.5%. Accounting disclosure in KIPCO's consolidated financial statements vary over time and under a very conservative assumption (taken at carrying value of KWD207 million ($722 million) for KIPCO stake) the MVL metric is 23.9%. We note that KIPCO received a $3.2 billion unbinding offer for 100% of OSN in 2014 which the company rejected. IMPROVEMENT IN OSN PERFORMANCE RESULTING IN DIVIDEND PAYMENT FOR THE FIRST TIME The financial performance of KIPCO's holding in the Panther Media Group Ltd (PMGL)/OSN media asset has improved significantly in 2013. The number of subscribers increased by 35% while revenues increased by 29%. This resulted in the company reporting a net profit of KWD10.4 million ($36.8 million) for the first time since inception in 2013 - and hence a cash payment to shareholders-, after a loss of KWD3.4 million ($12.0 million) in 2012. ASSETS HIGHLY CONCENTRATED BY BOTH INDUSTRY AND GEOGRAPHY 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 (sub-factor B for business diversity). The three most significant investments make up between 71%-78% (depending on different valuation assumptions for the OSN asset) of the portfolio's total value (sub-factor Ba for asset concentration). 60% of the underlying investments revenues and assets are based in Kuwait and other countries of the Gulf Cooperation Council (GCC) and another 27% 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 coverage ratio and reflects weak operating performance. For financial year (FY) 2013 (to 31 December), 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 in line with a year earlier. However, the level of dividends from BB is expected to decrease in 2014 as the bank adopts the Basel III regulations and hence needs to strengthen its equity base. On the other hand, PMGL/OSN paid

dividends for the first time since inception, confirming the positive performance that the media business has achieved over the last few years, while dividends from United Real Estate Company increased to $21 million from $7 million a year earlier. We further note that management continues with its portfolio streamlining exercise, whereby the group is seeking to reduce complexity by transferring the direct control of some of its subsidiaries' investments to KIPCO, which will increase transparency. This transfer of direct ownership to KIPCO will also allow the company greater access to cash flow. RATINGS BENEFIT FROM SHAREHOLDER SUPPORT KIPCO continues to benefit from shareholder linkages with Kuwait's ruling family, which lift the company's rating to Baa3. Members of the family own the company's principal shareholder, Al Futtooh Holding (AFH), which in turn owns a 63% stake, of which 45% is direct. Specifically, the rating takes into account support given to KIPCO over time by AFH, which includes purchasing treasury shares over time and exercising flexibility in adjusting dividend payments. In addition, we recognise that KIPCO's shareholding 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 Baa3 rating. Without this support, KIPCO's rating would likely be lower, given that the baseline credit assessment of its largest single holding, Burgan Bank, is ba1.

Liquidity Profile LIQUIDITY RATIOS POINT TOWARDS A MIXED PICTURE KIPCO's liquidity ratios reflect a mixed picture: the adjusted liquidity ratio (sub-factor Aaa) is strong, reflecting the extended debt maturity as the company does not face any significant debt maturities until January 2018. However, cash coverage (sub-factor Caa) at 0.9x (at FYE 2013) is weak, as the dividend income generated from underlying investments is low relative to the high cost of debt, 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 2019 maturities pay 4.8% interest compared with 8.9% for the 2016 maturities, both 5-year notes. ADJUSTED LIQUIDITY RATIO STRONG AS NO IMMEDIATE DEBT MATURITIES We assume that operating costs (rent, personnel, other overhead such as legal costs) at the holding level are moderate. Coupled with ample liquidity, ca. $1 billion post the bond issuance in February 2014, at the holding company, KIPCO is well-equipped to cover its operating and financing cash flows. The two debt instruments maturing over the course of 2016: a dual-tranche KWD80 million ($284 million) debt facility in January and $500 million EMTNs in October have been pre-financed by the $500 million issuance in February 2014. CASH COVERAGE REMAINS WEAK FOR THE RATING CATEGORY Cash coverage at 0.9x is weak for KIPCO's rating category. This reflects low dividend income with the primary source being BB, but also high interest expense reflecting two issuances of $500 million of notes with a combined annual interest paid of approximately $90 million. We expect interest paid to increase in 2015 due to the additional debt (ear-marked for repayment of debt maturing in 2016), and to start declining from then 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 up streaming 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 expect that the operating performance of KIPCO's core investments will improve by 2015 and that these improvements will become visible in at least two forms: higher valuation leading to stronger MVL ratios and higher cash dividends and therefore stronger cash coverage ratios. 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 concentration on weakened regional financial services assets.

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 Industry Grid [1][2] Factor 1: Asset Quality (30%)

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

Current FY2013 Measure Score

[3]Moody's 12-18 Month Forward ViewAs of September 2014 Measure

Score

Ba Ba Ba

Ba Ba Ba

Ba Ba Ba

Ba Ba Ba

15.5

A

15.5

A

A

A

A

A

Caa

Caa

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

Baa1 Baa3

A3 Baa3

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. [2] As of 12/31/2013; 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.

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATION") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY'S CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY'S CREDIT RATINGS OR MOODY'S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the

herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.

To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of

section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for "retail clients" to make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser.