Kuwait Financial Centre KPSC : Credit Rating Disclosure

Credit Rating Announcement

Ref: KW05021CRA04-03

15 November 2022

Kuwait Financial Centre's 5-Year Unsecured Bond Rating Affirmed

with a Stable Outlook

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Kuwait Financial Centre's (Markaz) KWD35mn or USD equivalent 5-YearSenior Unsecured Bond Rating at 'BBB'. The Outlook on the rating remains Stable.

The rating is driven by the Company's resilient financial metrics in terms of liquidity, good debt maturity profile, and moderate leverage. Other supporting factors are the high level of unencumbered assets and the maintenance of substantial unutilised but committed funding lines. The rating also reflects Markaz's well established franchise and good reputation in the region, especially in Kuwait. The experienced management team has continued to effectively navigate the Company through these challenging times.

The key constraint and challenge for Markaz remains the volatility of its earnings, which relates to its substantial portfolio of financial assets measured at fair value through profit and loss (FVTPL). Other constraints are the high concentration in terms of individual holdings and the high exposure to the real estate sector. Further constraints relate to the concentration in funding sources and to the reliance on asset sales and/or refinancing for repayment of the bond under review.

Notwithstanding the big swings of the financial markets in recent years and despite its small size, Markaz has maintained its reputation as being amongst the stronger fund managers in Kuwait. Reflecting its business model, financial investments and investment properties constituted the bulk of its asset base. The portfolio of financial investments remained spread across a range of industries and in many countries, although there remains some concentration towards the more regulated financial institutions and the GCC countries. The largest proportion of these financial investments is also in funds and portfolios that the Company manages. However as these investments are classified as FVTPL, they expose the Company to the potential volatility relating to financial market movements, which is considerable and unavoidable.

In recent years, and leveraging on its long-term experience in the real estate sector, the Company has built up a book of investment properties and investments in various real estate projects in the GCC region. These investments which include a managed fund are held for capital gains from future disposals/exits. At end H1 22, this portfolio accounted for over a third of total assets, which constitutes a high exposure to the real estate sector. This concentration risk is mitigated to some extent by the diversification by property type and geography. Moreover, the bulk of investment properties consist of income generating properties with good occupancy rates and the fund is managed by the Company. Rental income has also been rising and provides a boost to earnings.

The Company's assets are largely funded by equity and a moderate level of borrowings. Expansion of the equity base has been largely through the retention of earnings. Historically internal capital generation has been weak due to Markaz's fairly generous dividend payment policy. No dividend was however paid in 2020 due to the net loss position. While dividends resumed for FY2021, the payout ratio was moderate and the internal capital generation rate improved in 2021.

Borrowings declined in 2021 but picked up moderately in H1 22, and there remains some concentration in the bond under review. The successful lengthening of the debt profile in 2020 placed the Company in a good position to weather the challenging times of the pandemic; this was largely maintained in 2021 and H1 22. Following the trend of debt, leverage declined in 2021 but increased to a still moderate level at end H1 22. The debt to equity ratio also moved in tandem but remained sound at end H1 22. However, given the comparatively moderate level of earnings, there remains a reliance on asset sales or refinancing to repay large facilities such as the bond under review. Nonetheless the Company has maintained its track record of debt servicing and repayments in both 2021 and H1 22 through effective cash flow management, a good debt maturity profile position, and the maintenance of a good level of liquidity. Refinancing risk is considered moderate given its good access to the capital market; this is supported by

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Credit Rating Announcement

the Company's well established franchise, good reputation in the market, and the high level of unencumbered assets.

Markaz 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 positive in all maturity buckets and the Company continued to maintain a substantial level of unutilised but committed lines at end H1 22. The Company also remains well in compliance with the CBK's financial requirements relating to liquidity and leverage.

Markaz's AUM business segment improved in 2021 and the level of AUM more than fully recovered by end H1 22 from the substantial fall seen in 2020. The good financial markets in both these periods in turn contributed to a sizeable pick up of management fee and commission income in 2021 and H1 22, although they were moderate in absolute money terms. Other recurring income relating to dividend and interest income was also fairly limited. However the rising rental income has provided a sound boost to earnings. Markaz's return to a substantial net profit in 2021 was due largely to an equal significant fair value gain from its FVTPL investments. The Company's earnings growth moderated in H1 22 due to weakening markets. Both operating and net profitability ratios improved substantially in 2021 on the back of the high fair value gains; these were however unsustainable and both ratios fell back to a more moderate but still fairly good levels in H1 22.

Going forward, Markaz's earnings are once again likely to come under pressure from the volatile financial markets. These weakened in Q2 22 and remained so in Q3 22. With no significant recovery anticipated for the final quarter of this year, this is likely to result in fairly sizeable fair valuation losses relating to the portfolio of FVTPL financials for the full year 2022. The anticipated recovery of the real estate sector in the region from next year onwards could however provide a boost to earnings through exits and disposals of related investment properties. The quality of earnings is expected to remain moderate in line with the relatively low proportion of recurring income while the high level of FVTPL investments is likely to keep earnings volatile. On a positive note, EBITDA coverage of interest expense - even excluding fair valuation gain - was good in 2021 and improved further in H1 22.

Rating Outlook

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 volatility of financial markets against the Company's generally sound financial standing, solid liquidity and the well-established franchise and market reputation.

Rating Dynamics: Upside Scenario

Though seen as being unlikely within the next 12 months, the Outlook could be revised to Positive and/or the rating revised upwards if the Company's already sound financial metrics significantly strengthen, if potential volatility in TCI were to be noticeably reduced, and if recurring income were to be expanded, with this expansion proving to be sustainable.

Rating Dynamics: Downside Scenario

Although not our base case, the Outlook could be revised to Negative or the rating lowered by one notch in the next 12 months if there was a significant general weakening of financial metrics, which appears unlikely to be rectified in the short term. The normal volatility in earnings and/or OCI relating to market movements would not normally be sufficient to trigger this downside scenario.

Credit Ratings

Issue Rating	Outlook
BBB	Stable

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Credit Rating Announcement

Contact

Primary Analyst: Agnes Seah, Senior Credit Analyst; E-mail: [e-mail]

Secondary Analyst: Darren Stubing, Senior Credit Analyst

Committee Chairperson: Rory Keelan, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity's financial statements for FY2019-21 and H1 22. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

The principal methodologies used to determine the ratings are the Bond Rating Methodology (see http://www.ciratings.com/page/rating-methodologies/bond-ratings) and the Non-Bank Financial Institutions Rating Methodology, dated 27 April 2022 (see http://www.ciratings.com/page/nbfi-ratings). Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at www.ciratings.com/page/our-policies-procedures. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the issue were first released in November 2020. The ratings were last updated in November 2021. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

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