Moody's Investors Service yesterday cut the financial strength rating of Kuwait-based Gulf Investment Corporation (GIC) from D+ to D and warned that the rating is under review for further downgrade.
Moody's also downgraded GIC's long-term and short-term deposit ratings to Baa2/Prime-2 from A3/Prime-1 and its senior unsecured debt rating to Baa2 from A3.
All of GIC's ratings were placed on review for possible further downgrade, reflecting the company's ongoing high balance sheet exposure to market risk, which, under the current volatile conditions, could lead to a further erosion of its already weakened capital base, particularly if poor global market conditions persist.
The rating action has been prompted by the high market risk that the company has built up relative to its capital base and the increased volatility in its earnings, which are weighing on its ratings and challenging its business model.
"In recent years, GIC's business model has led it to grow its equity investments, hedge funds and structured products. Given the recent dire performance of such instruments, necessary provisions and asset write-downs are inevitably leading to a material erosion of the company's capitalisation," said Stathis Kyriakides, AVP-Analyst and lead analyst at Moody's for GIC.
Moody's recognises the company's efforts to manage its risks by diversifying its portfolio of financial instruments, in terms of both geographies and instrument types.
However, correlations under current extreme market stresses have converged, causing a rapid deterioration in the company's performance.