(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Kuwait Financial Centre’s (Markaz) KWD35mn or USD equivalent 5-Year Senior Unsecured Bond Rating at ‘BBB’. The Outlook on the rating remains Stable.

The Issue rating is driven by the Company’s resilient financial metrics in terms of liquidity and leverage, as well as the good recovery of management fees and commission income in H1 21. Other supporting factors include the lengthening of the debt maturity profile, the high level of unencumbered assets, and the maintenance of substantial unutilised but committed funding lines. The rating also reflects Markaz’s well established franchise and good reputation in the region, especially in Kuwait. The experienced management team has effectively navigated the Company through the pandemic and the fall of the stock market, with only a modest net loss in 2020, while a strong rebound was seen in H1 21.

The main challenge for Markaz remains the difficult operating environment due to the ongoing but declining impact of Covid 19. While assets under management (AUM) picked in H1 21, they remained lower than their pre-Covid level. The real estate sector in the GCC region has also remained weak. Additional challenges for the Company are the potential volatility in earnings given its substantial portfolio of financial assets at FVTPL, high individual holdings, and fairly large exposure to the real estate sector albeit that this is a key aspect of the business model. The Company’s funding is also concentrated in the two bond issues and remains reliant on asset sales and/or refinancing for the repayment of large facilities.

Markaz is a leading asset management and investment banking company in the MENA region. Despite the challenging conditions in both global and regional financial markets, the Company has continued to maintain its reputation as being amongst the stronger fund managers in Kuwait.

Reflecting its business model, the portfolio of financial investments (especially at FVTPL) is the Company’s largest asset class and represented more than half of its asset base at end H1 21. While these assets are fairly diversified across a wide range of industries and geography, there is some concentration towards the more regulated financial institutions and the GCC countries. The largest proportion of these financial investments is in funds and portfolios that it manages itself. However given the substantial size of this portfolio, the potential volatility relating to financial market movements is considerable. The second largest asset class is its book of investment properties which includes the Company’s direct investments in real estate projects in the GCC region. As this book accounted for just over a third of total assets, it constitutes a large exposure to the real estate sector. This concentration risk is mitigated to some extent by the diversification of property type and geography. Moreover apart from holdings in a real estate fund, the bulk of investment properties consist of income generating properties. Where real estate markets have been weak, the strategy has been to rent out completed buildings which have provided another source of recurring income – albeit moderate but improving. The underlying strategy for this book remains focused on anticipated capital gains from future disposals/exits.

Markaz’s financial ratios relating to liquidity and leverage in 2020 and end-H1 21 remained good. Notwithstanding the fall of financial investments at FVTPL, Markaz’s liquid asset ratio strengthened in 2020 on the back of a higher level of cash and deposits. The decline of the latter in H1 led to moderate slippage to a still sound ratio at end H1 21. The Company’s liquidity is also supported by the maintenance of substantial unutilised but committed lines.

While the Company has a history of prompt debt servicing and repayments, the repayment of large facilities such as the existing and new bonds remain reliant on asset sales and/or refinancing given the moderate level of recurring income. In this regard, a key strength of Markaz is its ability to raise funds on an unsecured basis and its continued access to the capital markets as demonstrated by the successful placement of the bond under review in 2020 despite the significant deterioration of the operating environment at that point due to the pandemic. The proceeds were used to repurchase a large proportion of the earlier existing bond and to repay a large proportion of bank borrowings. The lengthening of the debt maturity profile has placed the Company in a better position to weather the still challenging operating environment given the now fairly moderate repayments over the short to medium term.

Internal capital generation has been generally weak given the Company’s fairly generous dividend payment policy. Nonetheless with the decline in borrowings in both 2020 and H1 21, the Company’s already low leverage reduced further.

In terms of earnings, the Company’s performance will always to a large extent mirror the trend of the financial markets. The fall in 2020 led to a decline in management fees and commissions as well as large fair value losses of financial investments which led to a substantial decline in gross revenue. The recovery of the financial markets since Q4 20 on the other hand contributed to a significant growth in gross revenue, with a good recovery of management fee and commission income as well as a large fair value gain on its financial investments in H1 21. The Company was able to reduce operating costs in both periods while finance costs were also lower due to the cut in KWD interest rates in 2020 as well as the decline in borrowings. Nonetheless the substantial decline in gross revenue in 2020 resulted in a small net loss and conversely the significant growth in gross income in H1 21 contributed to a significant year on year increase in net profit and profitability ratios.

Going forward the favourable financial market conditions and rise in AUM augur well for the growth of management fee and commission income which represents the Company’s core and recurring income. The rising rental income would also contribute positively to earnings. In the medium to long term, the anticipated recovery of the real estate sector in the region could also provide a further boost to earnings through exits and disposal of related funds.

Rating Outlook

The Outlook for the rating is Stable, indicating that the issue rating is likely to remain unchanged over the next 12 months. The Outlook balances challenges relating to the slow economic growth, although prospects are improving against the Company’s generally sound financial standing, its well established franchise and good market reputation. The focus on maintaining solid liquidity will continue to place the Company in a good position to weather the still challenging operating environment.

Rating Dynamics: Upside Scenario

Though unlikely within the next 12 months, the Outlook could be revised to Positive and/or the rating revised upwards if the Company’s already sound financial metrics strengthen, potential volatility is noticeably reduced, and recurring income is expanded and this expansion proves sustainable.

Rating Dynamics: Downside Scenario

Although not our base case, the Outlook could be revised to Negative or the rating lowered by one notch in the next 12 months if there was a significant general weakening of financial metrics which appears unlikely to be rectified in the short term. The normal volatility in earnings and/or OCI relating to market movements would not normally be sufficient to trigger this downside scenario.

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-20 and H1 21. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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