Fitch Ratings has affirmed Gulf Investment Corporation’s (GIC) Long-Term Issuer Default Rating (IDR) at ‘BBB’ with a stable outlook. Fitch has also upgraded the Viability Rating (VR) to ‘bb’ from ‘bb-‘.
The upgrade of GIC’s VR reflects an improvement in its funding profile. The increase in long-term debt has diversified GIC’s funding and allowed it to repay shorter-term funding and better match its long-term investments. The upgrade also takes into account the entity’s improved asset quality, with impairment charges on principal investments, debt and equity securities falling by 50% yoy, representing 16% of pre-impairment operating profit in 2012 (2011: 21%).
GIC’s IDRs and Support Rating reflect the high probability of support that the institution could receive from its shareholders if required. The shareholders of the financial institution are, in equal parts, the six sovereign members of the Gulf Cooperation Council (GCC; Bahrain (BBB/Stable), Kuwait (AA/Stable), Oman (NR), Qatar (NR), Saudi Arabia (AA-/Positive) and the United Arab Emirates (NR)), which Fitch considers as institutional support due to their ownership stakes. Support takes into account the ability of the shareholders (as indicated by their ratings) and their track record of recent support for GIC despite Fitch’s opinion that it is of its limited strategic importance to its shareholders.
GIC’s IDRs and Support Rating are sensitive to a change in the ability of the shareholders to provide support to GIC if required and therefore to any change in their ratings. These ratings are also sensitive to any change in GIC’s articles of association or agreements with its shareholders indicating a lower propensity of support.
GIC’s VR reflects its sound capital ratios, adequate profitability, improved funding profile and ability to generate cash in order to service its debt. The agency considers management’s increased drive for cash income as positive for the rating. The VR also takes into account GIC’s modified business strategy since it made significant losses in 2008, focussing on highly rated, liquid securities to complement its long-term investments, as well as management’s track record of managing long-term investments across a range of sectors within the GCC. Additionally, the VR considers GIC’s reliance on wholesale funding and the lumpy nature of the institution’s earnings as a result of its investments in companies and projects, where income is mostly derived through capital gains on sales.
Upside potential for GIC’s VR could come from improved profitability and a diversification of revenues from more stable sources, particularly cash income. Negative pressure could come from weaker profitability, or deterioration in its funding profile that may be driven by inability to refinance its long-term debt, which could be a problem given a large proportion of its balance sheet is tied up in long-term investments.