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

Transcription

1 CREDIT OPINION Kuwait Projects Company (Holding) K.S.C.P. Update to discussion of key credit factors Update Summary RATINGS Kuwait Projects Company (Holding) K.S.C.P. Domicile Kuwait Long Term Rating a3 Type LT Issuer Rating - Fgn Curr Outlook Stable KIPCO's a3 ratings reflect (1) a relatively stable market value leverage (MVL) metric that has remained largely range-bound between 20%-25% with an estimate of 24.9% for 2017; (2) dominant market positions in the financial services and pay TV industries within the MENA region; (3) the historical track record of maintaining a strong liquidity profile with around $1.3 billion in cash at holding level as of December 2017 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 despite low dividend income Holdco debt Holdco cash Dividend income Holdco net debt Dec-14 Dec-15 2,500 Analyst Contacts Dion te VP-Senior Analyst dion.bate@moodys.com 2,000 USD Million 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. 1,500 1, Dec-12 Dec-13 Dec-16 Dec-17E Periods are financial year-end unless otherwise stated. Sources: Moody's Investors Service, Company data and FactSet Rehan Akbar VP-Senior Analyst rehan.akbar@moodys.com Juvereya Shoab Associate Analyst juvereya.shoab@moodys.com David G. Staples MD-Corporate Finance david.staples@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA The ratings also reflect (1) the concentration of assets in the financial services industry, making up approximately 49% of KIPCO's investment portfolio value and OSN making up another 25%; (2) capital re-investment strategy within its subsidiaries which results in low dividends up streamed and a weak FFO interest coverage ratio at holdco level; 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) has historically remained range-bound between 20%-25%» Historically healthy liquidity profile at parent level that covers debt obligations until July 2020

2 » 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 around 70% of the investment portfolio value (excluding cash)» Weak FFO interest coverage relative to investment grade peers» OSN facing cost pressures that has eroded profitability Rating outlook The stable outlook reflects the healthy liquidity profile of the holding company and an expectation that the financial and business profile of KIPCO's investment portfolio remains - on average - relatively healthy. 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 KEY INDICATORS [1] Kuwait Project s Company (Holding) K.S.C.P. Estimated Portfolio Value (USD bn) [2] Market Value Leverage (MVL) [3] Asset Concentration [4] (FFO + Interest Expense)/Interest Expense [5] 31-Dec % 61.1% 1.0.x 31-Dec % 63.4% 0.6.x 31-Dec % 59.5% 0.8.x 31-Dec % 55.5% 0.9.x 31-Dec % 53.9% 0.5.x 31-Dec-17E % 51.1% 0.3.x [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. The 31-Dec-17 FFO coverage ratio is based on Moody's estimates and does not represent the views of the issuer. Sources: Moody's Investors Service, Company data and FactSet 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 for the most updated credit rating action information and rating history. 2

3 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 nk K.P.S.C. (A3 stable), United Gulf nk B.S.C. 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. Detailed credit 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 18% to 27%. Exhibit 3 A steady investment portfolio has led to stable MVL 3,000 Listed investments Unlisted investments Other assets Market Value Leverage 40% 2,500 36% USD millions 2,000 32% 1,500 28% 1,000 24% % All figures are as of year-end unless otherwise stated. Sources: Moody's Investors Service and Company data Under a conservative assumption using OSN's book value of equity reported in KIPCO's financial statement ($674 million for KIPCO's stake), we estimate MVL to be 26.6% as of 2017YE, while using the fair value calculated in 2009 at the time of the Showtime Arabia and Orbit merger ($908 million for KIPCO's stake) results in a MVL of 24.9%. 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 17.7% as of 2017YE 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. Transformation of OSN operations will require re-investment with dividend payment unlikely for the next few years The operating performance of KIPCO's holding in OSN media asset has been improving since the merger in From , the number of subscribers have increased by a CAGR of 11% (1 million pay TV subscribers as of September 2017) while revenues increased by a CAGR of 15% over the same period. We expect OSN to continue to add subscribers and grow revenue given its strong market dominance, low pay TV penetration rates in the regions (MENA approx 10% compared to developed markets of > 50%) and broadening content offering with major Hollywood studios. While OSN was profitable from 2013 to 2015, changing viewership trends towards over the top operators (OTT) such as Netflix, has driven the need for OSN to transform the business. This will enable OSN to broaden its reach to the middle and lower end consumers and remain relevant to the market through mobile and OTT platforms. We view the transformation strategy as important for the long term sustainability of the business but anticipate the process to continue into 2019 before OSN returns to profitability. Increased cost structure since 2016 is a result of OSN's strategy to secure content from the leading studios with the anticipation that customer 3

4 growth will compensate for the increased costs. This entails execution risks and we therefore believe dividends paid to KIPCO over the next few years to be unlikely. Investments highly concentrated by asset and industry KIPCO's equity portfolio is highly concentrated around investments in the financial services industry (Burgan nk and United Gulf nk B.S.C.) and the Middle East ( for business diversity sub-factor). The three most significant equity investments make up around 70% of the equity portfolio value and about 51% if holding level cash is also included in the asset pool as of 31 December 2017 ( for asset concentration sub-factor). Around 59% of the underlying investment's revenues are based in Kuwait and other countries of the Gulf Cooperation Council (GCC) and another 41% in other countries (MENA 25%, Europe 15% and other 1%) (sub-factor for geographic diversity sub-factor). FFO interest coverage remains weak for the rating category but healthy liquidity is an off-setting factor FFO interest coverage (dividend received plus interest income less opex and tax expense / interest expense) 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 2016, this ratio stood at 0.5x and is estimated to fall to 0.3x for FYE 2017 which 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 10-year bond in February 2017 which was used to partially redeem the $500 million 2019 bond ($267 million repaid), pre-payment of the KD35 million ($115 million) bilateral facility that was due in 2018 and KD100 million bond issued in December This extended its weighted average maturity to 5.7 years from 3.7 years. 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. We recognise that KIPCO could exercise its control over some investments by up streaming 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. Over the longer term we would expect the FFO interest cover to improve to a more sustainable level that would be more consistent with a a3 rating. Dividend income has been weak and 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. KIPCO's dividend income is around $50 million for FY2017 driven by lower dividends from Burgan nk, thereby putting further pressure on FFO coverage. For financial year 2017, Burgan nk, KIPCO's most reliable dividend provider, distributed $14 million in 2017 (versus $50 million in 2016). As a result Burgan nk was the largest contributor to KIPCO's total income representing 20% with Gulf Insurance Group K.S.C.P. (A3 stable) and United Real Estate Company each contributing $10 million or 14% of total income. The decline in dividends for 2016 was mainly due to United Gulf Holding Company and OSN not distributing any dividends. 4

5 Exhibit 4 Decreasing dividend income has resulted in low FFO coverage Dividend income 4.0x FFO coverage x x x x 1.5x x 0.9x 1.0x 0.5x x (FFO + interest expense) / interest expense USD millions x 0.0x E FFO is defined as the sum of dividend, interest and other income less interest, operating and tax expense. All figures are as of year end FFO is based on Moody's estimates and does not represent the views of the issuer. Sources: Moody's Investors Service, Company data and FactSet We expect dividend income to remain susceptible to cash flow requirements from a number of KIPCO's growth investments. 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 a3 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 $1.3 billion of cash as of December 2017 while gross debt stood at about $2.2 billion. These cash balances can cover the holding company's debt obligations up until July 2020 when a $500 million bond is due (a for Liquidity sub-factor). Operating costs (rent, personnel, other overhead such as legal costs) at the holding level are manageable at about $30 to $40 million per year but we estimate interest expense paid in 2017 to be material relative to the dividend income, other income and interest income expected to be 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. KIPCO's debt maturity profile as of 31 December 2017 primarily consists of five bonds comprising of $233 million due in February 2019, $331 million due in 2024 and $500 million each due July 2020, March 2023 and February A bilateral facility of $139 million was outstanding as of December 2017 which was subsequently repaid in January 2018 increasing the total undrawn facilities to $379 million. 5

6 Rating methodology and scorecard factors In determining KIPCO's rating, we have applied our Investment Holding Companies and Conglomerates industry methodology, published in December The grid-indicated rating for KIPCO is 1 while the actual assigned rating is a a3. The one notch difference is attributed to KIPCO's strong liquidity profile which mitigates against the weaker FFO interest coverage metric as well as positive considerations around shareholder support. Exhibit 5 Kuwait Projects Company (Holding) K.S.C.P. Investment Holding Companies Industry Grid [1] Current as of 12/31/2017 Factor 1 : Investment Strategy (10%) Moody's Month Forward View [3] Measure Score Measure Score a) Asset Concentration b) Geographic Diversity c) Business Diversity d) Investment Portfolio Transparency a a a a a a a a A A a a a) (FFO + Interest Expense) / Interest Expense [2] 0.3x Caa 0.5x - 1x Caa b) Liquidity a a a a a) Investment Strategy Factor 2 : Asset Quality (40%) Factor 3 : Financial Policy (10%) a) Financial Policy Factor 4 : Estimated Market Value-based Leverage (MVL) (20%) a) Estimated Market Value-sed Leverage Factor 5 : Debt Coverage and Liquidity (20%) Rating: a) Indicated Rating from Grid 1 b) Actual Rating Assigned 1 a3 [1] sed on parent level (standalone) financials. [2] FFO interest coverage for year-end 2017 is based on Moody's estimates. [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 6 Category KUWAIT PROJECTS COMPANY (HOLDING) K.S.C.P. Outlook Issuer Rating ST Issuer Rating Moody's Rating Stable a3 P-3 KUWAIT PROJECTS CO SPC LIMITED Outlook Bkd Senior Unsecured Bkd Other Short Term Stable a3 (P)P-3 Source: Moody's Investors Service 6

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8 CLIENT SERVICES 8 Americas Asia Pacific Japan EMEA