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CREDIT OPINION 8 December 2016

Kuwait Projects Company (Holding) K.S.C.P. Update to Discussion of Key Credit Factors

Update

Summary Rating Rationale

RATINGS

Kuwait Projects Company (Holding) K.S.C.P. Domicile

Kuwait

Long Term Rating

Baa3

Type

LT Issuer Rating - Fgn Curr

Outlook

Stable

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. $1.2 billion in cash at holding level as of end-June 2016 and the propensity to actively pre-fund debt maturities to remove refinancing risk; and (4) shareholder linkages with Kuwait's ruling family. Exhibit 1

KIPCO's Holding Level Liquidity Has Remained Healthy While Dividend Income Has Been Increasing Albeit From a Low Base

Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date.

Analyst Contacts Rehan Akbar 971-4-237-9565 AVP-Analyst [email protected] Chady Abdel Nour 971-4-237-9531 Associate Analyst [email protected] David G. Staples 971-4-237-9562 MD-Corporate Finance [email protected]

Note: Dec-16F is Moody's estimate and incorporates the repayment of the $500 mn Oct-16 bond. Source: Moody's Investors Service, Company data

The ratings also reflect (1) the concentration of assets in the financial services industry, making up ca. 50% of KIPCO's investment portfolio value and OSN making up another ca. 25%; (2) a weak FFO interest coverage ratio relative to similarly rated peers; and (3) the geographical concentration in MENA, that has areas of heightened geopolitical and macroeconomic risks. The high asset 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 its larger holdings materially deteriorate.

Credit Strengths »

Market-value based leverage (MVL) expected to remain largely range-bound between 20%-25%.

»

Historically healthy liquidity profile at parent level that typically covers debt obligations for the coming three years.

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»

Supportive shareholder through Al Futtooh Holding (AFH), an investment vehicle associated with members of Kuwait's ruling family.

Credit Challenges »

High investment concentration with top three investments comprising more than 70% of the investment portfolio value (excluding cash).

»

Weak FFO interest coverage relative to investment grade peers.

Rating Outlook The stable outlook reflects financial performance improvements at the investee level and the healthy liquidity profile of the holding company.

Factors that Could Lead to an Upgrade We could upgrade the ratings if (1) KIPCO's MVL metric decreases below 20% on a sustainable basis; (2) its FFO interest coverage improves to well above 3.0x; and (3) its liquidity position remains healthy, 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.

Factors that Could Lead to a Downgrade We could downgrade the ratings if (1) KIPCO's MVL metric trends above 25% on a sustained basis; (2) the company's portfolio concentration becomes more material, and/or credit quality of its core holdings weakens; and (3) liquidity deteriorates because of upcoming debt maturities or as a result of M&A activities. Ratings could also be downgraded if KIPCO's dividend income weakens in the context of its FFO interest coverage ratio.

Key Indicators Exhibit 2

[1] Calculations are based on parent level (standalone) financials. [2] Estimated value of investment portfolio excludes holdco cash balances. [3] (Net Debt)/(estimated value of investment portfolio); Uses $908 mn fair value for KIPCO's stake in OSN which was calculated in 2009 during the merger of Showtime Arabia and Orbit. [4] (Top 3 investments)/(value of investment portfolio + cash at holding company level). [5] FFO at KIPCO holding level is typically the sum of dividend and interest income less opex, interest and tax expense. Source: Moody's Investors Service, Company data

Detailed Rating Considerations RELATIVELY STABLE MVL METRIC WITH POTENTIAL FOR HIGHER OSN VALUATION A number of KIPCO's core 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 between 21% to 26%. Under a conservative assumption using OSN's book value of equity reported in KIPCO's financial statement ($750 million for KIPCO's stake), we estimate MVL to be 25.8% as of 2015YE, while using the fair value calculated in 2009 at the time of the Showtime Arabia 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 www.moodys.com for the most updated credit rating action information and rating history.

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and Orbit merger ($908 million for KIPCO's stake) results in a MVL of 24.6%. 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 21.4% as of 2015YE if the $2.4 billion cash purchase price is used to value OSN. The challenge in assigning a fair value to OSN means that we will continue to monitor various valuation data points and its implication on the MVL metric. 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 more than 55% since 2012 while revenues increased by about 70% over the same period. OSN reported a net profit for the first time in 2013 ($36.8 million) and results have improved further in both 2014 and 2015 (about $63.5 million and $66.4 million respectively). OSN paid a cash dividend to its shareholder in both 2013 and 2015 and we believe that the media company has the potential to provide regular dividends to its shareholders over the medium term. INVESTMENTS HIGHLY CONCENTRATED BY ASSET AND INDUSTRY KIPCO's equity portfolio is highly concentrated around investments in the financial services industry (Burgan Bank and United Gulf Bank) and the Middle East (Ba for business diversity sub-factor). The three most significant equity investments make up more than 70% of the equity portfolio value and about 56% if holding level cash is also included in the asset pool (Ba for asset concentration sub-factor). 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 23% in other countries of the MENA region (sub-factor Ba for geographic diversity sub-factor). FFO INTEREST COVERAGE REMAINS WEAK FOR THE RATING CATEGORY BUT HEALTHY LIQUIDITY IS AN OFFSETTING FACTOR FFO Interest coverage has historically been weak for KIPCO and primarily reflects the low dividend income generated from underlying investments relative to debt funding costs (Caa for FFO Interest Coverage sub-factor). As of FYE 2015, this ratio stood at 0.9x and is fairly weak given KIPCO's investment grade rating. However, KIPCO has a good track record of pre-financing upcoming debt maturities, most recently issuing a $500 million 7-year bond in March 2016 ahead of the October 2016 bond maturity. Proactive pre-funding and maintaining material cash balances at all times has to a large extent removed refinancing risk and is a mitigating factor to the weak FFO interest coverage. Relative to KIPCO's dividend income of $140 million in 2015, KIPCO has high interest expense reflecting multiple capital market bonds outstanding with a combined annual interest expense of approximately $134 million in 2015. Interest expense was further elevated for about six months in 2016 due to the debt issuance in March 2016 which in our view was used to pre-finance the debt maturing in October 2016. Interest expense will decline from 2017 onwards following the repayment of the October 2016 bond as well as a result of lower cost of debt on KIPCO's most recent bond issuance (8.875% coupon on the October 2016 bond versus 5% for the March 2023 bond). We recognise that KIPCO could exercise its control over some investments by upstreaming higher dividend payments. The company has so far largely refrained from doing so as it retains ample liquidity at the parent level and opts to maintain financial flexibility. We therefore expect that the FFO interest coverage ratio will remain weak over the medium term as capital at the various investments is used to pursue growth opportunities. DIVIDEND INCOME HAS BEEN IMPROVING BUT REFLECTS A DEGREE OF STRUCTURAL WEAKNESS AT INVESTEES We believe that the low absolute cash dividend payout of KIPCO's investments is a structural weakness as it results in low cash income for the holding company and consequently a weak FFO interest coverage ratio. For financial year 2015, UGB did not distribute any dividends (which has been the case since 2010, except an in-kind dividend in FY2012), while Burgan Bank distributed about $41 million in 2015 (versus $15 million in 2014). Burgan Bank is KIPCO's most reliable dividend provider with an average annual dividend payment of $25 million between 2012-2015. On the other hand, OSN paid dividends for the first time since inception in 2013 ($30 million) as well as in 2015 ($60 million). Meanwhile, dividends from United Real Estate Company and United Industries Company have varied in previous years but together have averaged about $15 million annually between 2013-2015. In total, the investment portfolio paid out $140 million in dividends

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for 2015, $107 million in 2014 and $89 million in 2013. The trend in KIPCO's dividend income is positive but it is yet to be seen if this trajectory can be sustained, particularly payouts made by OSN. We note that a number of KIPCO's investments remain in a growth stage and rather than distributing dividends, the investees have generally been redeploying operational cash flows into the businesses themselves. However, we do 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. 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 64% stake in KIPCO of which 45% is direct. Specifically, the rating takes into account support given to KIPCO by AFH in the past, 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 Analysis KIPCO at the holding level has a healthy liquidity position, with about $1.2 billion of cash as of end-June 2016 while gross debt stood at about $2 billion. These cash balances can cover the holding company's debt obligations up until July 2020 when a $500 million bond is due (Baa for Liquidity sub-factor). Operating costs (rent, personnel, other overhead such as legal costs) at the holding level are manageable at about $30-35 million per year but $134 million of interest paid in 2015 is material relative to $140 million of dividend received in the same year. We believe that KIPCO has the ability to exercise its control over some investments in order to upstream higher dividend payments. The company has so far largely refrained from doing so as it retains ample liquidity at the parent level and opts to maintain financial flexibility. We estimate that gross debt stood at about $1.58 billion as of end-October 2016 following the repayment of the $500 million bond due in October 2016. KIPCO's debt maturity profile as of end-October 2016 primarily consists of three $500 million bonds due in February 2019, July 2020 and March 2023 and we assume a $80 million bilateral facility is also currently outstanding.

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 64% stake in the company, of which 45% is direct.

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Kuwait Projects Company (Holding) K.S.C.P.: Update to Discussion of Key Credit Factors

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MOODY'S INVESTORS SERVICE

Rating Methodology and Scorecard Factors Exhibit 3

[1] Based on parent level (standalone) financials. [2] FFO interest coverage for year-end 2015 used for current view. [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. Source: Moody's Investors Service

Ratings Exhibit 4

Category KUWAIT PROJECTS COMPANY (HOLDING) K.S.C.P.

Outlook Issuer Rating ST Issuer Rating

Moody's Rating

Stable Baa3 P-3

KUWAIT PROJECTS CO SPC LIMITED

Outlook Bkd Senior Unsecured Bkd Other Short Term

Stable Baa3 (P)P-3

Source: Moody's Investors Service

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Kuwait Projects Company (Holding) K.S.C.P.: Update to Discussion of Key Credit Factors

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MOODY'S INVESTORS SERVICE

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REPORT NUMBER

6

8 December 2016

1049930

Kuwait Projects Company (Holding) K.S.C.P.: Update to Discussion of Key Credit Factors