Fitch Ratings has upgraded Gulf Investment Corporation’s (GIC) Long-term Issuer Default Rating (IDR) to ‘A-‘ from ‘BBB’ with a Stable Outlook and its Short-term IDR to ‘F1′ from ‘F3′. A full list of rating actions is at the end of this commentary.
The upgrade follows discussions with GIC’s sovereign shareholders, which has led Fitch to reassess available support. The six countries of the Gulf Corporation Council (GCC) hold equal shares in GIC. Fitch believes GIC is strategically important to the GCC as a result of its objective of economic cooperation between member states. Fitch has also considered GIC’s special status as a GCC entity, its economic and commercial development mandate as well as its relevance in providing specialist financing to key economic sectors.
KEY RATING DRIVERS – IDRS AND SUPPORT RATING
GIC’s IDRs and Support Rating reflect an extremely high willingness and ability from the shareholders to provide support if required. Fitch’s assessment of the shareholders’ ability to support reflects the financial health of the group of GCC sovereigns as a whole, two of which, Kuwait and Saudi Arabia are rated ‘AA'; Bahrain is rated ‘BBB’. The remaining three countries, Oman, Qatar and the United Arab Emirates are not rated by Fitch. The high willingness of the group to support GIC reflects its strategic importance to the GCC.
GIC’s Support Rating and IDRs factor in Fitch’s view that support would be provided by all shareholders together in a timely manner but also take into account a remote risk that payment could be delayed from one or two of the group, as was the case when GIC was supported in 2009. However, the agency believes that the risk of delayed payment has notably reduced since then given the increased importance we understand the shareholders now place on timely support being provided by all.
Following GIC reporting large losses on international securities in 2008, the shareholders equally contributed to the USD1.1bn capital injection in 2009. A delay from some shareholders did not prevent ample support coming to GIC on time. The shareholders have also waived dividends until GIC recovers its past losses. The company has refocused its strategy on the GCC and its original mandate. GCC government and related entities also provide a large proportion of its funding.
The Short-term IDR has been upgraded to ‘F1′ from ‘F3′. As the IDRs are support driven, ‘F1′ has been assigned as opposed to ‘F2′, because of the relative confidence of the support propensity in the short term.
Fitch believes that if required, support could be made available in the form of capital, or liquidity, via mobilisation of deposits from quasi-government entities of the shareholders. These depositors have consistently formed the core of GIC’s deposit base, and have been stable.
RATING SENSITIVITIES – IDRS AND SUPPORT RATING
The bank’s IDRs and SR are sensitive to a change in Fitch’s view of the importance of GIC to its shareholders. Any deterioration in the ability to support the entity is unlikely, given the relative size of GIC to its shareholders.
KEY RATING DRIVERS – VR
GIC’s VR reflects its business model, consisting of less liquid equity investments in its Principal Investments (PI) portfolio, coupled with a relatively highly rated debt and equity securities portfolio in its Global Markets business. GIC’s income is exposed to volatility from infrequent disposals of PI investments. The VR also considers the bank’s well matched funding profile and its reliance on wholesale term funding, exposing it to market sentiment. An improvement in GIC’s asset quality, particularly in its securities portfolio, also drives the VR.
RATING SENSITIVITIES – VR
GIC’s VR may be sensitive to a prolonged dislocation in the wholesale funding markets. This is likely to be mitigated by contingent liquidity in the form of deposits that are likely to be forthcoming via the shareholders. The VR is also sensitive to a sharp fall in income and asset quality deterioration.
Established in Kuwait in 1983, GIC was formed with a mandate to promote private enterprise and economic and commercial development in the GCC region. GIC is the only financial institution incorporated as a GCC domiciled entity, permitting GIC a ‘local status’ in all GCC countries. It also has other privileges such as exemption from taxation. GIC’s core business, PI, focuses on medium to long-term private equity investments within the GCC. The PI group has encouraged development in the GCC since its inception and remains relevant, as they are able to facilitate business in sectors where other financial institutions lack expertise and experience. The global markets group (GMG) is responsible for managing GIC’s portfolio of investment securities including debt securities (government and corporate), equities and funds (debt, equity, and private equity). GMG has repositioned its strategy since making large losses in 2008, refocusing on the GCC region.
The rating actions are as follows:
Long-term IDR upgraded to ‘A-‘ from ‘BBB'; Outlook Stable
Short-term IDR upgraded to ‘F1′ from ‘F3′
Support Rating upgraded to ‘1’ from ‘2’
Viability Rating affirmed at ‘bb’