S&P affirms Bahrain’s Mumtalakat Holding at BBB

Gulf Air Flights
Gulf Air’s expected losses continue to haunt ratingf of Bahrain’s Sovereign Fund Mumtalakat, S&P says on Frinday
Standard & Poor’s Ratings Services on Friday affirmed its ‘BBB’ long-term local and foreign currency issuer credit ratings on Bahrain’s Sovereign Fund, Mumtalakat Holding Company.

However, it warned that S&P could revise our view on Mumtalakat’s role for and link with the government if the sovereign does not cover losses at Gulf Air as expected.

At the same time, S&P raised the short-term issuer credit ratings on the company to ‘A-2’ from ‘A-3’. The outlook on the long-term ratings remains negative.

“The ratings reflect our assessment of Mumtalakat under our criteria for rating government-related entities (GREs). Although the Bahraini government does not formally guarantee Mumtalakat’s financial liabilities, the ratings on Mumtalakat are equalized with those on the Kingdom of Bahrain (BBB/Negative/A-2) because we believe that there is an “almost certain” likelihood that the Bahraini government would provide timely and sufficient extraordinary support to Mumtalakat in the event of financial distress,” S&P in a statement said.

“We expect Mumtalakat’s ownership structure to remain unchanged over the long term. The government directly controls all of Mumtalakat’s important operational and financial transactions through its dominant representation on Mumtalakat’s board of directors. Bahrain’s Deputy Prime Minister is the chairman of Mumtalakat’s board of directors. The Ministers of Finance and Transport are also members of Mumtalakat’s board, which underlines our view of the company’s integral link with the government. We understand that major investments or divestments require the assent of the country’s most senior leadership,” it added.

Mumtalakat’s public policy role consists of managing the Kingdom’s wealth while contributing to Bahrain’s longer-term strategy to diversify away from the hydrocarbons sector. The company manages a corporate portfolio in the non-oil and gas sectors, both in Bahrain and abroad, although currently most of the assets are domestic state-owned enterprises in banking, manufacturing, real estate, telecommunications, and aviation. Mumtalakat operates on behalf of the government and does not take material investment decisions without the government’s knowledge. This, coupled with Mumtalakat’s operational proximity to the Bahraini government and repeated governmental capital increases, leads us to conclude that the government would be willing to provide substantial ongoing support to Mumtalakat’s operations and to intervene in a timely manner if the company were to require extraordinary financial support.

“We consider that the ongoing financial difficulties experienced by Gulf Air, which is fully owned by the Kingdom of Bahrain through Mumtalakat, and the continued discussion about its restructuring, have raised questions about the sovereign’s willingness and ability to provide extraordinary support to a major national enterprise. However, we believe that the government will provide, in the near future, direct coverage of losses at Gulf Air, thus limiting potential liabilities for Mumtalakat. We therefore consider that the government would respond more quickly if Mumtalakat experienced financial stress,” S&P in a statement said.

“We assess Mumtalakat’s stand-alone credit profile (SACP) at ‘bb’. The SACP is constrained by Mumtalakat’s current geographic concentration in Bahrain and its relatively weak operating performance, which is largely attributable to state-owned airline Gulf Air and the start-up nature of some of its investments. However, we view positively Mumtalakat’s reported adjusted loan-to-value ratio of around 30% and its interest and operating expense coverage ratio of 3.9x for the year to Dec. 31, 2011.

“The upgrade of the short-term ratings to ‘A-2’ reflects the revision of our criteria regarding the link between long-term and short-term sovereign credit ratings. According to our criteria, the short-term rating is derived directly and solely from the long-term rating. The upgrade does not reflect a change in our view of Mumtalakat’s short-term creditworthiness.”

The negative outlook, it said, mirrors that on the sovereign and reflects our view that Mumtalakat’s integral link and critical role for the Bahraini government will remain unchanged.

“We also assume that the government will provide, in the near future, direct coverage of losses at Mumtalakat’s fully owned subsidiary, Gulf Air. We could revise our view on Mumtalakat’s role for and link with the government if the sovereign does not cover losses at Gulf Air as expected, or act in a timely manner to protect Mumtalakat, as these factors could affect our assessment of the likelihood of the government providing extraordinary support.

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