S&P: Bahrain Mumtalakat Holding Co. Outlook Revised To Negative

Standard & Poor’s Ratings Services today revised its outlook on Bahrain-based Mumtalakat Holding Co. (Mumtalakat) to negative from stable. At the same time, S&P affirmed their ‘BBB/A-2’ long- and short-term foreign and local currency issuer credit ratings on Mumtalakat.

“The ratings on Mumtalakat are based on equalization with the ratings on the Kingdom of Bahrain (BBB/Negative/A-2), reflecting our opinion that there is an “almost certain” likelihood that the government of Bahrain would provide timely and sufficient extraordinary support to Mumtalakat in the event of financial distress, though we note that the government does not formally guarantee Mumtalakat’s financial liabilities.

“Mumtalakat is the investment company for Bahrain’s strategic assets in sectors other than oil and gas. Wholly owned by Bahrain, Mumtalakat held stakes in 36 commercial enterprises that represented a portfolio of approximately Bahraini dinar 2.7 billion ($7.2 billion) as of June 30, 2014, across a variety of sectors, including aluminum production, financial services, telecommunications, real estate, tourism, transportation, and food production.

“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.

“Mumtalakat’s public policy role consists of managing Bahrain’s wealth while contributing to its longer-term strategy to diversify away from the hydrocarbons sector. The company manages a corporate portfolio in sectors other than oil and gas, 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. Although Mumtalakat has not paid any dividends to the government since its inception, we believe that the likely strain on government revenues from lower oil prices could increase the likelihood that the government could request that Mumtalakat contribute to public finances. However, Mumtalakat’s operational proximity to the Bahraini government, and repeated capital increases by the government, 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 note that, after five consecutive years of losses, Mumtalakat was profitable in 2013 (net profit $220 million), primarily thanks to improved operational performance at state-owned airline Gulf Air. This trend continued through the first half of 2014 and with no investment impairments–net profit stood at $117 million on June 30, 2014, versus $131 million at the same time in 2013.

“In November 2014, Mumtalakat created two Euro Medium-Term Note (EMTN) programs worth a total $2 billion; one $1 billion conventional EMTN program; and a Sukuk program valued at $1 billion, which the company subsequently tapped for $600 million. We understand that this issuance is solely intended for refinancing purposes, rather than for investment funding.

“We assess Mumtalakat’s stand-alone credit profile (SACP) at ‘bb’, based on our methodology for investment holding companies. We focus on loan-to-value and interest and operating expense coverage ratios. Consolidated financial metrics complement our assessment, but are not our primary focus. The SACP is constrained by Mumtalakat’s current geographic concentration in Bahrain and its relatively weak operating performance, which is largely attributable to Gulf Air and the start-up nature of some of its investments. We view positively Mumtalakat’s adjusted holding company loan-to-value ratio of about 25 per cent and interest and operating expense coverage ratio at 1.9x for 2013. We forecast a similar coverage ratio in 2014 on strong performances by aluminum smelter ALBA and telecom Batelco. We consider Mumtalakat’s liquidity to be adequate as defined by our criteria.

“The negative outlook reflects our view of the downside risks to the sovereign rating, given our assumption that Mumtalakat’s integral link and critical role for the Bahraini government will remain unchanged.

“We continue to assume that the government will provide direct coverage of losses at Gulf Air, as required. We could revise our view on Mumtalakat’s role for and link with the government if the sovereign decided not to cover Gulf Air’s losses, or did not act in a timely manner to protect Mumtalakat, as this could affect our assessment of the likelihood of extraordinary support.”

Originally published on www.cpifinancial.net