credit analysis gulf investment corporation … investment corporation g.s.c. rating outlook ......

RATINGS

Gulf Investment Corporation G.S.C. Rating Outlook

Long-term Issuer A2 Stable Senior Unsecured A2 -- Short-term Issuer P-1 --

Table of Contents:

OVERVIEW AND OUTLOOK 1 RATING RATIONALE 3 APPENDICES 14 MOODY’S RELATED RESEARCH 19 RELATED WEBSITES 19

Analyst Contacts:

DUBAI +9714.237.9536

Mathias Angonin +971.4.237.9548 Analyst [email protected]

SINGAPORE +65.6398.8320

Christian De Guzman +65.6398.8327 Vice President - Senior Analyst [email protected]

Thomas Byrne +65.6398.8310 Senior Vice President / Manager [email protected]

NEW YORK +1.212.553.7864

Anne Van Praagh +1.212.553.3744 Managing Director [email protected]

CREDIT ANALYSIS

SOVEREIGN & SUPRANATIONAL MAY 5, 2015

This Credit Analysis provides an in-depth discussion of credit rating(s) for the Gulf Investment Corporation and should be read in conjunction with Moody’s most recent Credit Opinion and rating information available on Moody's website.

Gulf Investment Corporation G.S.C. Supranational

Overview and Outlook

In May 2014, we upgraded GIC's rating to A2 from Baa2 following a change in the methodological approach used to rate this entity, now rated under the Multilateral Development Bank and Other Supranational Entities rating methodology published in December 2013.

GIC's business model has evolved with a greater emphasis on development-related activity through its principal investment portfolio. In contrast to other multilateral development banks (MDBs), GIC's equity investments are more susceptible to income volatility, but such risks are mitigated by GIC's strong capital buffer and recent track record of profitability.

GIC's balance sheet continues to deleverage – but concentration is expected to increase. The risks associated with the geographic concentration of GIC's activities within the Gulf Cooperation Council (GCC) is in part mitigated by the sectoral diversification of its businesses.

GIC's healthy liquidity reflects a comfortable term to maturity, a stock of discounted liquid assets which is larger than GIC's total debt outstanding, and demonstrated access to a diversified investor base. However, a significant portion of GIC's funding comes from deposits, and although these deposits have proven stable, the potential for balance sheet maturity mismatch may increase as GIC's portfolio of principal investments continues to expand.

The A2 rating also balances the absence of contractual support against the relatively high capacity of shareholders to provide support. Since a call on capital in 2008, GIC's capital base has been comprised exclusively of paid-in capital. Nevertheless, shareholder support is bolstered by the relatively high sovereign ratings of its six GCC members, while the increase in paid-in capital that was completed in 2009 amply demonstrates the propensity of support.

In addition, GIC's special status as the only financial institution established under the auspices of the GCC and its public policy mandate strengthen considerations related to reputational risk, while substantiating the use of the MDB rating methodology.

The stable outlook reflects our expectation that GIC's capital buffers and liquidity position will be sustained. We also expect GIC to stabilize leverage and place greater emphasis on its principal investment portfolio.

This Credit Analysis elaborates on GIC’s credit profile in terms of Capital Adequacy, Liquidity and Strength of Member Support, which are the three main analytic factors in Moody’s Supranational Rating Methodology.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=180874

https://www.moodys.com/credit-ratings/Gulf-Investment-Corporation-GSC-credit-rating-600021233

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_161372


SOVEREIGN & SUPRANATIONAL

2 MAY 5, 2015

CREDIT ANALYSIS: GULF INVESTMENT CORPORATION G.S.C.

Organisational Structure and Strategy

Private-Sector Arm of the GCC

GIC is a leading financial institution providing a range of financial services to promote private enterprise and support economic growth in the six countries of the GCC region: Bahrain (Baa3 negative), Kuwait (Aa2 stable), Oman (A1 negative), Qatar (Aa2 stable), Saudi Arabia (Aa3 stable) and the United Arab Emirates (Aa2 stable). As of 31 December 2014, the company reported a consolidated asset base of US$5.2 billion.

GIC was established in 1983 by the six countries comprising the GCC, as a regional financial institution to play a leading role in stimulating private enterprise and project funding for economic and social development in the region. The company is incorporated in Kuwait and owned equally by all six GCC countries. GIC’s main activities involve investment in projects and equity participations, which are divided into four separate sections – Financial Services and Utilities, Manufacturing Industries, Diversified GCC Projects and Light Industry Projects.

The company’s businesses are conducted through two groups: Principal Investments and Global Markets Principal Investments: This group, which in 2014 accounted for 54.8% of the company’s net operating income, comprises the core business activities of GIC, including equity participations and investment in commercial projects involving venture capital, greenfield investments, mergers and acquisitions, privatizations, initial public offerings (IPOs) and secondary private placements. Furthermore, GIC invests directly in utility projects involving power, telecommunications and other infrastructure, as well as chemicals and metals. As of 31 December 2014, the division reported consolidated assets of US$2.4 billion (US$2.6 billion in 2013).

Global Markets: This group has five divisions;

(i) Debt Capital Markets: This division comprises GIC’s activities related to fixed- and floating-income investments in marketable debt securities, including international corporate securities, structured finance, mortgage-backed securities, sovereign debt securities, Islamic bonds and asset-backed securities. As of 31 December 2014, this division reported consolidated assets of US$1.7 billion (US$1.8 billion in 2013), and accounted for 16.1% of the company’s net operating income in 2014.

(ii) GCC Equities (iii) Managed Funds: These divisions comprise GIC’s activities involving the respective management of GCC equities and alternative investment portfolios, including Islamic funds, private equity, and hedge funds. As of 31 December 2014, these divisions reported consolidated assets of US$0.7 billion, and accounted for 26.8% of the company’s net operating income in 2014.

(iv) Treasury: This division transacts business in derivatives and cash money markets on behalf of GIC, mainly for liquidity management purposes, and also manages short-term interest rates and foreign exchange using off-balance-sheet treasury applications. As of 31 December 2014, the division reported consolidated assets of US$0.4 billion, and accounted for 1.8% of the company’s net operating income in 2014.

(V) Corporate and Other: This division includes all items not directly attributable to any of the above divisions, including strategic investments and income from recharging group net free capital to business units. Its other operations involve operations and risk management, and financial control. As of 31 December 2014, this division accounted for 0.6% of the company’s net operating income.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

http://www.moodys.com/


3 MAY 5, 2015


EXHIBIT 1

GIC’s shareholding structure, 2014 ($ million)

Source: GIC

Rating Rationale

Our determination of a supranational’s rating is based on three rating factors: Capital Adequacy, Liquidity and Strength of Member Support. For Multilateral Development Banks, the first two factors combine to form the assessment of Intrinsic Financial Strength, which provides a preliminary rating range. The Strength of Member Support can provide uplift to the preliminary rating range. For more information please see our Supranational Rating Methodology.

Capital Adequacy: Medium

Sound capital position but relatively high-risk equity portfolio

Factor 1

Scale Very High High Medium Low Very Low

+ -

Capital adequacy assesses the solvency of an institution. The capital adequacy assessment considers the availability of capital to cover assets in light of their inherent credit risks, the degree to which the institution is leveraged and the risk that these assets could result in capital losses.

Moody’s assesses the GIC’s capital adequacy as moderate, which balances a strong capital position with volatile asset quality related to GIC’s equity investments. Other MDBs that score ‘Medium’ for this factor include GuarantCo (A1 stable) and the Islamic Corporation for the Development of the Private Sector (ICD, Aa3 stable).

Since 2008 GIC has devoted larger share of resources to principal investments

GIC is mainly a “strategic investor” with an eye towards the development of the private sector in GCC countries. In 2008, upon approving a call on the entire stock of unpaid capital, the board of directors decided to revisit GIC’s business model, reduce its exposure to international (non-GCC) investments, and focus on GCC direct and private equity investments. The past six years has been characterized by a restructuring and a deleveraging with a renewed focus on principal investments.

Kuwait (Aa2)350

Qatar (Aa2)350

United Arab Emirates (Aa2)350

Saudi Arabia (Aa3)350

Oman (A1)350

Bahrain (Baa3)350



4 MAY 5, 2015


Given the development of the financial sector and consequent financial deepening in the GCC since its inception in 1983, for example, GIC has opted to wind down its asset management arm, which among others established the first GCC-based mutual fund in 2003. GIC’s pool of interest-bearing assets (including highly liquid, marketable bonds; bank placements; and cash) have halved since end-2008. At the same time, its principal investments or equity stakes in associated companies have doubled. As of 2014, both are roughly equal at around $2 billion each (see Exhibits 2).

EXHIBIT 2

Composition of total assets, 2014

Source: GIC

GIC’s capital position has strengthened, while trend deleveraging persists

GIC has a large amount of shareholder’s equity relative to its operating assets. Following large operating losses in 2008 in the order of US$1 billion, accounting for about half of the capital base in 2007, GIC received additional capital from members, which coupled with the recent deleveraging, has reinforced GIC’s capital position. As of 2014, GIC’s capital base represented 94% of operational assets, a very high level, even among MDBs.

EXHIBIT 3

GIC’s capital position has improved over time

2006 2007 2008 2009 2010 2011 2012 2013 2014

Asset Coverage Ratio1 30.1 28.3 13.0 45.9 59.0 73.2 67.3 80.3 94.0

Debt/Usable Equity 203.1 214.1 504.7 159.9 96.1 71.1 110.6 63.8 51.7

Source: GIC

Since 2008, GIC has considerably reduced its leverage, with the debt-to-usable equity dropping from 5 times in 2008 to less than 60% in 2014. It is also apparent when comparing total assets against shareholder equity, with this ratio falling from 10.9 times as of end-2008 to 1.9 times in 2014. After the capital increase of 2008, the return to profitability since 2009 has contributed to the strengthening of the capital base, which has gone from $1,750 million to $2,750 million between 2009 and 2014. At the same time, accumulated losses went from $686 million to $23 million in 2014.

1 Usable equity divided by loans and equity investments

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

$ m

ilion

Interest bearing assets Equities & Managed funds Principal Investments Other Assets


5 MAY 5, 2015


Leverage has picked up in 2014 as term financing continues to be a better match vis-à-vis GIC’s equity investments, as compared to deposits or repo funding – which was almost completely phased out as of 2014. Issuance is guided by an asset/liability gap target which is determined yearly. In 2014, this gap was set at $250 million. In addition, GIC has a target for medium term financing of 30% of total assets.

EXHIBIT 4

GIC’s capital ratios are similar to other A-rated MDBs Usable Equity / Loans + Equity Operations Debt / Usable Equity

Source: Moody’s

GIC has some volatility in asset performance, and assets are relatively concentrated

GIC’s business model is riskier than other MDBs that make loans to public or private sector entities, although GIC operates in a more benign environment than many MDBs. 2008 was the only year in GIC’s 31-year history it had recorded a loss; however, they were mostly due to treasury investments – $475 million of the $996 million loss was attributed to mark-to-market valuations.

Principal Investment assets are highly concentrated in the GCC (around 97% of assets) and the top 10 exposures comprise 60% of assets, a relatively high level among rated MDBs. Nevertheless, GIC’s portfolio is relatively diversified given the split in assets between securities investments and direct equity holdings, as well as between sectors.

GIC’s principal investments are governed by controls linked to its capital base; no single industry or sector can exceed 20% of the capital base. The top sectors of exposure are chemicals – mostly related to GIC’s holding in the second-largest titanium dioxide producer – heavy industries (steel), and utilities (power and water). Other large holdings include stakes in telecommunications providers in Africa and reinsurance. Despite its focus on direct investments in the GCC, investee companies operate globally.

We expect GIC’s financial performance to be resilient to the downturn in oil prices over the past year given the diversification of its principal investments. Petrochemicals only comprise 13.5% of principal investments, while GIC’s investee companies could benefit from lower input prices given the energy intensity of industries such as chemical and steel manufacturing.

GIC’s concentration in a relatively narrow range of countries is not out of line with regional MDBs that also focus their operations on a similarly limited set of countries. Moreover, GIC’s operating environment is characterized as relatively favorable since all of the GCC countries benefit from an investment grade environment—although the smallest economies have negative outlooks (Bahrain and Oman) – reflecting

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012 2013 2014

%

GIC AFC (A3 stable)BSTDB (A2 negative) CABEI (A1 stable)A-median (2013)

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011 2012 2013 2014

%

GIC AFC (A3 stable)BSTDB (A2 negative) CABEI (A1 stable)A-median (2013)


6 MAY 5, 2015


sound institutions and high competitiveness. Nevertheless, these countries are subject to the same vulnerabilities, especially those related to hydrocarbon prices and geopolitical risks.

Profitability is very strong and improving. Return-on-assets averaged 2.9% over the past 5 years, amongst the highest in our MDB universe, along with other private-sector MDBs such as AFC and IFC (Aaa stable). This reflects high net gains from its investments, from “share of results from associates” as well as dividends. In 2014, GIC’s shareholders decided to resume dividends for the first time since 2007. A cash dividend of $105 million was declared for the year ended 31st December 2014, representing about half of net income.

EXHIBIT 5

A diversified portfolio by country but concentrated in the MENA region Concentration of assets by country, 2014 Concentration of assets by sector, 2014

Source: GIC

Liquidity: High

Although highly reliant on deposits, GIC has a large amount of liquid assets and low funding costs

Factor 2


+ -

A financial institution’s liquidity is important in determining its shock absorption capacity. We evaluate the extent to which liquid assets cover debt service requirements and the stability of the institution’s access to funding.

Moody’s asses the GIC’s liquidity as ‘High’, similar to Aa3-rated Corporation Andina de Fomento (CAF) and A2-rated Black Sea Trade & Development Bank (BSTDB). Liquidity is supported by the large size of liquid assets relative to short-term liabilities and low cost of funding.

We do not expect GIC’s liquidity to be significantly affected by the imminent tightening in US Federal Reserve monetary policy or the possible change to global liquidity conditions. In part, this is because of active management of treasury assets that has capably generated a stable source of revenue. In addition, we project relatively stable macroeconomic conditions in the large GCC countries in the context of lower oil prices – as indicated in the stable sovereign rating outlooks on Kuwait, Qatar, Saudi Arabia, the United Arab Emirates – which should translate to GIC’s continued access to a depositor base comprised mostly of government-related entities in these jurisdictions.

Saudi Arabia45%

Bahrain34%

UAE11%

Oman3%

Qatar2%

Kuwait2% Non GCC

3%

Chemicals39%

Metals & Mining20%

Telecommunication Services9%

Utilities9%

Capital Goods7%

Construction Materials5%

Insurance4%

Other7%


7 MAY 5, 2015


Solid liquidity position on account of high debt service coverage and sticky deposits

GIC’s debt-service coverage ratio2 (DSCR) is high relative to other MDBs. At 15.5% in 2014, it is well below the average for A-rated MDBs of 32.4%. However, GIC’s DSCR was higher in the past, at 41% in 2010. The recent decline is due to the gradual phasing-out of repo funding, which peaked at $2.4 billion in 2007 and amounted to $226 million as of January 2015. Repo funding remains available as a contingent source of funding, with GIC maintaining 30% of its securities holdings as eligible for repo as part of contingency measures under its control frameworks.

GIC does not have a commercial paper or other short-term issuance program. In addition, GIC is now a net placer of funds in the interbank market, boosting its capacity to meet its debt obligations.

GIC’s large reliance on short-term deposits is a potential source of weakness as we consider deposits as a one of the least resilient sources of funding. As of 2014, deposits accounted for about one third of liabilities, at $772 million, down from $1.1 billion in the previous year. GIC has gradually reduced its reliance on deposits, which represented up to 39% of liabilities in 2007, by issuing long-term debt. Furthermore, we consider that deposits are relatively sticky, with more than 90% of these deposits sourced from government-related entities, such as member countries’ central banks, sovereign wealth funds, national oil companies, and public pension/social security funds. Including deposits, the debt service coverage ratio jumps to 46.7% as of 2014 (see Exhibit 6).

Deposits – whose terms typically range from three weeks to one year – are also seen as a more scalable source of funding that is more appropriate given GIC’s business model. For example, GIC’s liquidation of a part of its holdings in the National Titanium Dioxide Company (CRISTAL, unrated) – among other activities contributing to the fall in net investments in 2014 – was matched by a fall in deposits.

EXHIBIT 6

GIC’s liquidity ratios have improved over time

Source: GIC

The nominal and relative amounts of GIC’s treasury assets – composed of interest-bearing assets – is ample, although it has diminished over time. In 2014, they stood at 38% of total assets and 137% of debt as of end-2014 (see Exhibit 7). The credit quality of these assets is moderate, with the median credit rating of interest-bearing assets at A as of 2014 (see Exhibit 8).

2 The sum of short-term debt and currently-maturing long-term debt as a percentage of liquid assets

0

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30

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60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

%

(ST Debt + CMLTD) / Treasury Assets (ST Debt + CMLTD + Deposits) / Treasury AssetsA-rated MDB median for asset coverage ratio (2013)


8 MAY 5, 2015


EXHIBIT 7

GIC has a large treasury portfolio

2006 2007 2008 2009 2010 2011 2012 2013 2014

Treasury Assets/Total Assets 66.7 65.4 60.9 59.9 48.3 39.6 47.2 37.3 37.6

Treasury Assets/Total Debt 264.5 329.9 211.9 230.7 236.7 199.0 139.8 133.8 137.1

Source: GIC

EXHIBIT 8

Distribution of interest-bearing assets by rating

Source: GIC

Nevertheless, a large part of non-treasury assets are also considered liquid by GIC, and liquid assets3 make up close to two-thirds of total assets, according to the Corporation. As part of the control framework, there is a broad liquidity policy that mandates a minimum level of 63% for the ratio of liquid assets to total assets. In addition, there is a minimum level of 126% required for the ratio of liquid assets to volatile liabilities. This latter ratio uses readily realizable assets, which then factors in conservative haircuts and discounts, as the numerator; the denominator is defined as liabilities maturing in less than 90 days. GIC comfortably meets each of these thresholds with the liquid assets to volatile liabilities ratio improving from about 146% in 2009 to about 222% in 2014. However, the overall management of the annually determined asset-liability gap guides funding decisions.

EXHIBIT 9

Composition of the GIC’s assets and liabilities by maturity ($ million) Assets 2013 2014

Less than 3 months 2,732 2,660

3 to 12 months 612 553

1 to 5 years 130 472

Over 5 years 2,230 1,501

Total 5,704 5,186

Liabilities 2013 2014

Less than 3 months 1,153 611

3 to 12 months 308 585

1 to 5 years 1,432 997

Over 5 years 233 243

Total 3,126 2,436

Source: GIC

3 Assets with a maturity of one year or less

Aa20%

A46%

Baa28%

<Baa4%

NR2%


9 MAY 5, 2015


Low cost of funding, based on existing debt

The average maturity of GIC’s debt is relatively long, supporting its strong liquidity profile. The maturity profile of GIC’s term issuances is spread out with an average term to maturity of 1,024 days at end-2014. There is a target for medium term financing of 30% of total assets for the purposes of asset-liability management, and to maintain market access.

GIC has established a solid track record of issuance and has placed paper in several different markets and currencies. These include, in 2014, a tapping of its US dollar EMTN program (GIC Funding Limited), a Swiss franc issuance, and sukuk issuances in Malaysian ringgit. Each non-US dollar issuance is hedged, hence, GIC’s debt structure is not directly impacted by exchange rate volatility. Demand for GIC paper has been healthy among large institutional investors, including the largest pension funds in Malaysia, as well as private placements in the past with GCC investors such as sovereign wealth funds.

GIC’s funding costs are particularly low compared to other MDBs. As of 2014, we estimate that the average interest rate on GIC’s debt was around 3.2%, in line with the median for A-rated MDBs.

Strength of Member Support: Low

Lack of contractual callable capital and high correlation between shareholders constrain member support

Factor 3


+ -

Contractual support primarily manifests itself in the callable capital pledge, which is a form of emergency support. Extraordinary support is a function of shareholders’ ability and willingness to support the institution in ways other than callable capital. Strength of member support can increase the preliminary rating range determined by combining factors 1 and 2 by as many as three scores.

Moody’s assesses GIC’s member support as ‘Low’, in line with CAF (Aa3 stable) and Fondo Latinoamericano de Reservas (FLAR, Aa2 stable). Moody's notes that unlike the majority of similarly-rated MDBs, GIC does not benefit from contractual member support, although its shareholders have proven their propensity to support GIC through their provision of paid-in capital, as well as their continued placement of large deposits in GIC.

In 2008 shareholders were prompt in addressing GIC’s capital needs

GIC is unique among MDBs rated by Moody’s because it has redeemed the callable portion of its capital structure following substantial losses made during the global financial crisis. The capital called in 2008 was paid by shareholders throughout 2008 and early 2009. As a result, common or paid-in capital more than doubled between 2007 and 2009, from $1.0 billion to $2.1 billion – equally shared by all GCC countries – and has remained at that level since 2009 (see Exhibit 10). The call on capital, along with strong profitability after 2008 has helped to increase shareholder’s equity, from $2.0 billion in 2007 to $2.8 billion as of 2014.

Following six consecutive years of profits, GIC’s shareholders decided to resume dividends, and a cash dividend of $105 million was announced after the finalization of financial results for 2014, representing roughly half of GIC’s profits for that year. We typically assess the profitability of an MDB in terms of the contribution that it makes to building or depleting the institution’s capital base. In the case of GIC, the board decided to forgo dividend distributions in the past six years to rebuild the Corporation’s capital base.


10 MAY 5, 2015


Consequently, GIC now has a solid capital base, but successive dividend payments could erode GIC’s capital ratios if it decided to expand its operations.

Following the 2008 call on capital, GIC’s shareholders did not restore the stock of callable capital. As a result – unlike most MDBs – GIC no longer benefits from contractual member support mechanisms. This acts as a constraint on our assessment of member support, according to Moody’s methodology for MDBs.

EXHIBIT 10

Capital structure 2014

Subscribed Capital ($ Million) Paid-in Capital ($ Million) % of Subscribed Capital % of Paid-in Capital

Kuwait (Aa2 stable) 350 350 16.7 16.7

Qatar (Aa2 stable) 350 350 16.7 16.7

United Arab Emirates (Aa2 stable) 350 350 16.7 16.7

Saudi Arabia (Aa3 stable) 350 350 16.7 16.7

Oman (A1 negative) 350 350 16.7 16.7

Bahrain (Baa3 negative) 350 350 16.7 16.7

Total 2,100 2,100 100 100

Source: GIC, Moody’s

A high propensity but a moderate size

The members’ sense of ownership and reputational risk are key considerations in assessing the likelihood that shareholders will support GIC in times of stress. GIC is the only financial institution established under the auspices of the GCC under an agreement signed between its members in 1982; to this day it is the only entity incorporated as a GCC company. Besides, GIC’s shareholders have explicitly committed to support GIC’s strategic role in the region.

Nevertheless, GIC is a small institution relative to other regional MDBs; it is roughly the same size as the Arab Petroleum Investment Corporation (APICORP, Aa3 stable) and nearly one-fourth the size of the Islamic Development Bank (IsDB, Aaa stable), both of which benefit from contractual callable capital. Moreover, while GIC’s activities have contributed to the diversification of economic activity in the GCC, the projects supported by other regional MDBs have a wider geographic reach.

Shareholders have considerable resources to provide GIC with support

According to our sovereign ratings, the median shareholder’s rating for GIC was Aa3 as of 2014. This is similar to APICORP and Council of Europe Development Bank (Aa1 stable). We do not envisage a change in GIC’s ownership structure in the near future.

Due to high oil prices in 2010-2014, GCC countries have accumulated considerable resources in their sovereign wealth funds, which Moody’s estimates at $2.2 trillion at the end of 2014 (equivalent to 133% of the aggregate GDP of GCC countries). Although the recent drop in oil prices stands to reduce these financial buffers, they could be used to provide GIC with extraordinary support. Indeed, the 2008 call on capital coincided with a period of low oil prices.

Besides capital, shareholders continue to maintain deposits in GIC. While we consider deposits as a less durable source of funding than tier 1 capital, GIC’s deposits have been stable and would likely serve as a contingent form of liquidity. At least 75% of deposits are provided by public entities with credit ratings equivalent to A or higher (see Exhibit 11).


11 MAY 5, 2015


EXHIBIT 11

GIC’s depositors are mostly institutions related to its shareholders

Source: GIC

0

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400

600

800

1000

1200

2013 2014

$ m

illio

n

Deposits from public financial institutions Deposits from supranational and government-related entitiesDeposits from central banks Deposits from commercial banks


12 MAY 5, 2015


Rating Range

Combining the scores for individual factors provides an indicative rating range. While the information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ from the ones implied by the rating range. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the indicative rating range. For more information please see our Supranational Rating Methodology.

Supranational Rating Metrics: Gulf Investment Corporation

Capital Adequacy How strong is the capital buffer?

Intrinsic Financial Strength

Sub-Factors: Capital Position, Leverage, Asset Performance

Very High High Medium Low Very Low

+ -

Liquidity How strong is the institutions’ shock absorption capacity?


+ -

Sub-Factors: Position, Funding


+ -

Strength of Member Support

How strong is members’ support of the institution?

Sub-Factors: Contractual Support, Extraordinary Support


+ -

Rating Range: A2-Baa1

Assigned Rating: A2



13 MAY 5, 2015


Comparatives

This section compares credit relevant information regarding the Gulf Investment Corporation with other supranationals rated by Moody’s Investors Service. It focuses on a comparison with supranationals within the same rating range and shows selected credit metrics and factor scores.

GIC has similar asset coverage and leverage ratios as the median for A-rated MDBs, including BSTDB. CABEI and APICORP compensate their weaker capital ratios with better asset quality. GIC’s liquidity indicators are in line with the A-rated median, with APICORP and AFC displaying stronger debt service coverage ratio. Finally, GIC has a high weighted median shareholder rating, but similar to AFC, the absence of callable capital is a major constraint on member support.

EXHIBIT 12

GIC vs. key peers Year GIC AFC BSTDB CABEI APICORP ICD A Median

Rating/Outlook A2/STA A3/STA A2/NEG A1/STA Aa3/STA Aa3/STA --

Total Assets (US$ million) 2013 5,704 1,925 1,286 7,537 5,675 1,217 1,925

Factor 1 Medium Medium Medium Medium High Medium --

Usable Equity/Gross Loans Outstanding +Equity Operations (%)[1]

2013 80.3 172.9 82.3 42.0 46.9 85.5 81.7

Debt/Usable Equity (%)[1] 2013 63.8 49.3 44.7 204.7 94.1 23.3 49.3

Gross NPLs/Gross Loans Outstanding (%)[2] 2013 0.0 0.0 5.6 0.6 2.3 20.2 0.0

Factor 2 High High High High High High --

ST Debt + CMLTD/Liquid Assets (%)[3] 2013 38.0 6.6 32.4 63.8 10.0 100.5 32.4

Bond-Implied Ratings (Average) 2013 Baa3 -- Baa2 A1 -- -- Baa2

Intrinsic Financial Strength (F1+F2) Medium High Medium High High High --

Factor 3 Low Very Low High Medium Very High Medium --

Total Debt/Discounted Callable Capital (%)[4] 2013 -- -- 38.0 546.8 360.9 -- 292.4

Weighted Median Shareholder Rating (Year-End) 2013 Aa3 B2 Baa3 Ba1 Aa3 Aa3 Baa3

Rating Range (F1+F2+F3) A2-Baa1 Aa2-A1 Aa3-A2 Aa1-Aa3 Aaa-Aa2 Aa1-Aa3 --

Notes:

[1] Usable equity is total shareholder's equity and excludes callable capital

[2] Non-performing loans

[3] Short-term debt and currently-maturing long-term debt

[4] Callable capital pledge by members rated Baa3 or higher, discounted by Moody's 30-year expected loss rates associated with ratings.

Source: Moody’s, GIC, AFC, BSTDB, CABEI, APICORP, ICD


14 MAY 5, 2015


Appendices

Rating History

Gulf Investment Corporation G.S.C. Issuer Rating Senior Unsecured Outlook

Long-term Short-term

Date

Rating Upgraded A2 P-1 A2 Stable May 2014

Review for Upgrade -- -- Baa2 RUR+ April 2014

Outlook Changed -- -- Baa2 Stable July 2010

Rating Lowered -- -- Baa2 Negative February 2009

Rating Lowered -- -- A3 Negative October 2008

Rating Raised -- -- A2 Stable June 2005

Rating Raised -- -- Baa1 -- June 2002

Rating Assigned -- -- Baa2 -- February 1997


15 MAY 5, 2015


Annual Statistics

Gulf Investment Corporation G.S.C.

2007 2008 2009 2010 2011 2012 2013 2014

Balance Sheet (USD Million)

Total assets 9,175 7,211 6,113 5,776 5,881 6,292 5,704 5,186

Cash 19 34 35 22 50 72 63 63

Due from other financial institutions 809 1,030 1,030 632 546 884 345 250

Due from banks 0 0 1,030 632 546 884 345 250

Due from banks - national bank 0 0 121 0 60 48 71 4

Due from banks - foreign bank 0 0 909 632 486 836 274 246

Securities purchased under resale agreements (reverse repos) 186 0 0 0 0 0 0 0

Due from other financial institutions - other 623 1,030 0 0 0 0 0 0

Securities and investments 6,879 4,982 3,728 3,511 3,211 3,421 3,206 2,840

Trading securities 628 474 324 350 0 0 0 0

Trading securities - other debt securities 193 0 0 0 0 0 0 0

Trading securities - equity securities 431 0 0 0 0 0 0 0

Trading securities - money market funds 4 0 0 0 0 0 0 0

Trading securities - other 0 474 324 350 0 0 0 0

Other financial assets designated at fair value through profit or loss (FVTPL)

661 619 277 291 565 621 706 449

Other equity instruments at FVTPL 661 2 2 2 292 307 340 303

Debt instruments at FVTPL 0 0 0 0 0 21 53 23

Other financial assets at FVTPL 0 617 275 289 273 291 311 121

Investment securities 5,590 3,889 3,127 2,870 2,646 2,800 2,500 2,391

Available for sale securities 4,738 3,850 3,127 2,870 2,646 2,800 2,500 2,391

Available for sale securities - sovereign government 364 263 771 687 553 816 857 998

Available for sale securities - asset-backed securities 0 0 80 48 44 0 114 83

Available for sale securities - other debt securities 4,079 2,873 1,544 1,189 1,027 1,051 517 569

Available for sale securities - equity securities 295 356 427 592 725 649 575 460

Available for sale securities - other 0 358 305 354 297 284 221 206

Investment securities - held to maturity 547 39 0 0 0 0 0 0

Investment securities - held to maturity - sovereign government 145 0 0 0 0 0 0 0

Investment securities - held to maturity - other debt securities 193 39 0 0 0 0 0 0

Investment securities - held to maturity - other 209 0 0 0 0 0 0 0

Other securities - liquid 305 0 0 0 0 0 0 0

Fair value of hedging derivative financial instruments / portfolio hedge valuation adjustment (IFRS)

1 0 0 19 18 25 1 3

Loans and leases to customers - net of unearned income and allowance for loan losses

40 110 85 74 74 0 0 85

Loans and leases to customers - gross 45 112 88 77 75 0 3 85

Allowance for loan losses 5 2 3 3 1 0 0 0

Fixed assets - net 26 26 38 36 118 110 112 116

Property, plant and equipment - total 26 26 38 36 118 110 112 116

Investments in unconsolidated subsidiaries and affiliates 1,060 808 1,009 1,250 1,597 1,559 1,703 1,560


16 MAY 5, 2015



2007 2008 2009 2010 2011 2012 2013 2014

Other assets - total 341 221 188 232 341 221 274 269

Total liabilities and capital 9,175 7,211 6,113 5,776 5,881 6,292 5,704 5,186

Total Liabilities 7,217 6,549 4,363 3,659 3,476 3,989 3,126 2,436

Due to other financial institutions 5,176 4,166 2,571 2,285 1,962 1,517 1,164 772

Deposits from banks 1,124 396 123 171 78 173 30 58

Due to central bank 528 473 105 254 50 80 80 110

Securities sold under agreements to repurchase 2,372 1,270 1,211 856 538 425 55 0

Other amounts due to other financial institutions 1,152 2,027 1,132 1,004 1,296 839 999 604

Fair value of derivative financial instruments used for hedging 11 141 65 57 107 80 76 94

Senior bonds, notes and other long-term borrowings 1,820 2,071 1,587 1,179 1,171 2,123 1,589 1,423

Other liabilities - total 210 171 140 138 236 269 297 147

Liabilities for retirement benefits 48 53 58 61 0 0 0 0

Accrued expenses 108 79 45 37 41 41 27 21

Accrued interest 108 79 45 37 41 41 27 21

Accounts payable 48 37 37 40 195 228 270 126

Reserves 6 2 0 0 0 0 0 0

Total Shareholder's Equity 352.5 399.3 457.5 514.4 581.8 684.7 770.2 893.5

Noncontrolling interest - minority interest 0 0 0 0 16 17 19 21

Common shares 1,000 1,550 2,100 2,100 2,100 2,100 2,100 2,100

Retained earnings and related reserves - total 755 (302) (211) (60) 121 251 415 616

Retained earnings 301 (756) (686) (565) (420) (316) (184) (23)

Legal reserve 292 292 0 316 334 347 363 383

Voluntary reserves 162 162 0 189 207 220 236 256

Retained earnings - other 0 0 475 0 0 0 0 0

Accumulated other comprehensive income 203 (586) (139) 77 168 (65) 44 13

Unrealized gains (losses) on securities 203 (586) (139) 77 232 260 304 181

Unrealized gains on securities 203 0 0 77 232 260 304 181

Unrealized (losses) on securities 0 (586) (139) 0 0 0 0 0

Cash flow hedging reserve 0 0 0 0 (64) (325) (260) (168)

Capital Structure (USD Million)

Paid-up capital 1000 1550 2100 2100 2100 2100 2100 2100

Callable capital 1100 550 0 0 0 0 0 0

Incl. Aaa-Aa countries 550 275 0 0 0 0 0 0


17 MAY 5, 2015



2007 2008 2009 2010 2011 2012 2013 2014

Income (USD Million)

Income

Total Income 769 266 233 267 344 273 359 379

Total Expenses 516 1,262 142 116 162 142 194 176

Interest income 308 249 84 43 41 42 38 38

Interest income and fees on loans 2 3 4 1 1 1 0 0

Interest income and dividends on investment securities 250 0 0 0 0 0 0 0

Trading account interest income 0 0 0 0 0 1 1 1

Interest income from financial assets available for sale 0 202 72 37 37 37 34 36

Interest income from financial assets held to maturity 0 8 1 0 0 0 0 0

Interbank interest income 56 33 7 5 3 3 3 1

Other interest income 0 3 0 0 0 0 0 0

Interest expense 333 262 85 50 59 61 69 58

Interest expense on deposits 132 0 0 0 0 0 0 0

Interest expense on long-term debt 108 86 33 13 28 42 63 53

Interbank interest expense 0 102 33 18 16 13 5 5

Interest expense on repo loans 93 74 19 19 15 6 1 0

Net interest income (expense) (25) (13) (1) (7) (18) (19) (31) (20)

Net fees and commissions income 41 17 22 7 20 26 35 13

Income from trading activities / gains (losses) on financial instruments through profit and loss

55 (207) 73 36 6 34 80 79

Net income arising from investment securities / financial investments 249 68 33 8 27 40 79 85

Gross dividends from investment securities 22 23 17 20 24 28 42 28

Non-interest income 85 17 12 16 29 44 38 45

Total non-interest income 452 (82) 157 87 106 172 274 250

Loan loss provisions (100) (1) 1 0 0 0 0 0

Other provisions 0 (2) (1) 0 0 0 0 0

Total operating expenses / charges 56 62 56 56 84 99 165 78

Share of associates profit / joint venture profit 25 118 7 149 227 98 112 74

Non- recurring losses (gains) - as reported 243 960 16 22 49 21 25 23

Net income (loss) 253 (996) 91 151 182 131 165 203


18 MAY 5, 2015



2007 2008 2009 2010 2011 2012 2013 2014

Performance Statistics (%)

Return on Average Assets 2.9 -12.2 1.4 2.5 3.1 2.2 2.8 3.7

Return on Earning Assets 3.0 -12.6 1.4 2.7 3.3 2.3 2.9 4.0

Return on Usable Equity 13.1 -76.0 7.5 7.8 8.0 5.6 6.8 7.6

Interest on Loans/Loans Outstanding 6.6 7.9 3.6 2.3 2.6 2.2 2.8 2.4

Interest Coverage Ratio (x) 1.0 -6.5 1.9 3.6 3.3 2.8 3.0 4.1

Capital Adequacy Ratios (%)

Usable Equity as % Debt 107.6 32.0 110.3 179.6 205.4 108.5 162.2 193.3

Usable Equity + CC of Aaa/Aa Members/Debt 137.8 45.2 110.3 179.6 205.4 108.5 162.2 193.3

Usable Equity/Gross Earning Assets 22.2 9.5 29.7 38.6 44.5 38.8 48.0 56.7

Liquidity Ratios (%)

Liquid Assets/Total Assets 65.4 60.9 59.9 48.3 39.6 47.2 37.3 37.6

Liquid Assets/Total Debt 329.9 211.9 230.7 236.7 199.0 139.8 133.8 137.1

Maturity of Outstanding Borrowings (% of total)

One Year 0.0 24.1 44.1 47.0 1.1 23.8 7.0 22.4

More than One Year through Five Years 100.0 70.3 48.6 42.0 88.1 65.0 79.0 63.0

More than Five Years 0.0 5.6 7.3 11.0 10.8 11.2 13.9 14.5

Reserves to Earning Assets Ratio (%)

Total Reserves/Earning Assets 8.6 -4.3 -3.6 -1.1 2.2 4.2 7.7 12.7


19 MAY 5, 2015


Moody’s Related Research

Rating Action: » Moody's upgrades Gulf Investment Corporation's provisional MTN rating to (P)A2; A2/P-1 issuer ratings

assigned

Credit Opinion: » Gulf Investment Corporation

Rating Methodologies: » Multilateral Development Banks and Other Supranational Entities, December 2013 (161372)

» Sovereign Bond Ratings, September 2013 (157547)

Moody’s Website Links: » Sovereign Risk Group Webpage

» Supranational Ratings List

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

Related Websites

For additional information, please see:

» The Gulf Investment Corporation’s website: http://www.gic.com.kw/

MOODY’S has provided links or references to third party World Wide Websites or URLs ("Links or References") solely for your convenience in locating related information and services. The websites reached through these Links or References have not necessarily been reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control. Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services provided by any third party.

https://www.moodys.com/research/Moodys-upgrades-Gulf-Investment-Corporations-provisional-MTN-rating-to-PA2--PR_298620

https://www.moodys.com/research/Moodys-upgrades-Gulf-Investment-Corporations-provisional-MTN-rating-to-PA2--PR_298620

https://www.moodys.com/research/Gulf-Investment-Corporation-GSC-Credit-Opinion--COP_600021233



http://www.moodys.com/researchandratings/market-segment/sovereign-supranational/-/005005/4294966293/4294966623/-1/0/-/0/-/-/en/global/rr

http://v2.moodys.com/moodys/cust/content/loadcontent.aspx?source=StaticContent/BusinessLines/Sovereign-SubSovereign/RatingsListSR.htm&Param=ALL

http://www.gic.com.kw/

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=180874


20 MAY 5, 2015


Report Number: 180874

Authors Mathias Angonin Christian De Guzman

Production Associate Gomathi M

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