Kuwait Financial Centre bond rating affirmed with Stable outlook
Capital Intelligence Ratings (CI Ratings or CI) has affirmed the rating of Kuwait Financial Centre’s (Markaz) KWD 25 million Debenture Bond at ‘BBB’.
The outlook on the rating remains ‘Stable’. The rating is underpinned by the Company’s substantial investment holdings (which are both diversified and fairly liquid), the good flow of management fees and commission income (which provide a good level of recurring income), and the moderate leverage together with the significant improvement in the debt maturity profile. The widening of the lender base is also a positive development. The shift of asset allocation away from the more volatile financial markets towards the normally more stable real estate sector in recent years is another supporting factor. The rating also reflects the Company's well established franchise, its conservative business model and good reputation.
Markaz remains a leading asset management and investment banking institution in the MENA region. Amid the challenging conditions in both the global and regional financial markets, the Company has continued to outperform relevant benchmarks for its funds and managed portfolios guided by an experienced management team. Markaz’s core earnings remain anchored by the good flow of asset management fees and commissions. The Company is also among the most experienced real estate investment firms in GCC region. With its involvement in the sector dating back a number of decades and with staff physically located in the countries in which it currently operates, the Company has an advantage over its competitors in better understanding these markets.
Markaz’s financial profile continues to reflect its business model and strategies. In 2016 and at end H1 2017, the largest proportion of the Company’s asset base remained in its funds and managed portfolios. However, these investments remained fairly liquid and were diversified across industries and geography. Its book of direct real estate investments – comprising residential projects in Saudi Arabia and the UAE – has been rising in line with the development of ongoing and planned projects. It should be noted that the Company’s underlying strategy for these investments is to book capital gains from sales in due course. In this regard, the Company’s financial forecasts indicate substantial expected gains over the medium term.
Markaz’s financial ratios in 2016 and end H1 2017 remained sound and were maintained well within Central Bank of Kuwait (CBK) guidelines. The level of liquid asset holdings rose in 2016 with the higher level of cash and bank deposits and conversely declined in H1 2017 with the large fall. Nonetheless, liquid assets to short-term debt coverage remained good at end H1 2017 aided by the significant improvement in the debt maturity profile following the issue of the five-year bond under review in 2016. The addition of new lenders has also widened the Company’s base of lenders which is another positive development.
While the repayment of any large facility such as the Bond is still dependent on refinancing and/or asset sales, Markaz’s debt service capability remains sound and is supported by the still low leverage, an unencumbered asset base, the fairly liquid profile of its financial investments, and a rising level of unutilised but committed lines. Another strong supporting factor is the Company’s demonstrated ability to continue to raise substantial additional committed unsecured facilities whenever required, as well as the successful repayment of the KWD 22 million bond in 2016.
In terms of earnings, the Company’s performance was substantially boosted by the large positive change in its fair value through profit and loss investments in 2016 and more so in H1 2017. Translated return on average assets consequently improved noticeably in both 2016 and in H1 2017. A positive factor was the good level of recurring income which rose in 2016 notwithstanding the marginal decline in H1 2017.
The main constraints to the Company’s rating are the potential volatility in earnings, as well as impact on equity through other comprehensive income given its substantial portfolio of financial investments and the relatively high concentration within this portfolio, although this relates to funds managed by the Company. The Company’s funding base also remained concentrated in the form of the bond under review, however this has reduced somewhat with the rise in bank borrowings. The heightening of geopolitical risk in the GCC region which adds to the challenging global environment is another constraint. In this regard, Markaz will follow a defensive policy for its assets under management in the MENA region as well as maintaining a good level of liquidity in its balance sheet and funds.
Kuwait Financial Centre S.A.K. (Markaz) was established in August 1974 by the late Sheikh Ali Sabah al-Salem al-Sabah. Its shares were listed on the Kuwaiti Stock Exchange (KSE) in April 1997. At end H1 2017, the Company had assets totalling KWD 160 million ($527 million) and an equity base of KWD 113 million ($374 million). For the first half of 2017, the Company’s net profit reached KWD 2.9 million compared to the low KWD 0.5 million reported for the same period last year.