Bahrain-Based Gulf Finance House Lowered To 'B+' And Placed On CreditWatch Negative

Press Release

• The improvement in the liquidity position of Bahrain-based Islamic wholesale investment bank Gulf Finance House proved to be more limited, in our view, than we had previously expected.
• We consider the recent unexpected departure of the CEO and the end to talks about a joint venture with Macquarie to be additional challenges to revenue generation.
• We are lowering our long-term rating on GFH to 'B+' from 'BB+' and placing it on CreditWatch with negative implications.
• The negative implications reflect the uncertainties we see about the execution of GFH's measures to improve funding and liquidity.

PARIS (Standard & Poor's) Jan. 14, 2010--Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on Bahrain-based Gulf Finance House G.S.C. (GFH) to 'B+' from 'BB+' and affirmed its 'B' short-term rating. In addition, we placed both the long- and short-term ratings on CreditWatch with negative implications.

"The rating action reflects our more negative assessment of the bank's funding and liquidity position as well as its ability to implement its revised business model to boost revenues," said Standard & Poor's credit analyst Goeksenin Karagoez.

In our review of GFH in November 2009, we had considered the bank's large capital increase, sale of an asset, and convertible debt issuance to improve its liquidity profile. However, subsequently, the bank took other actions that in our view partly limited this improvement:

• GFH increased its holding of treasury shares, reducing the amount of cash it received from the capital increase.
• We understand the bank is holding $20 million of the $100 million convertible murabaha it issued in December 2009.
• GFH transferred about $40 million in cash to its outstanding projects.
• The bank bought back $9 million of its sukuk due in 2012.
• The bank's plan to issue a second convertible murabaha for $100 million related to the creation of a joint venture with Macquarie that did not occur.

With total assets of $2.5 billion on Sept. 30, 2009, GFH is an Islamic wholesale investment bank based in the Kingdom of Bahrain (A/Stable/A-1). The bank's main focus and area of expertise is economic infrastructure projects. Geographic and sector concentrations are high, in our view, because the bank has focused on real estate, infrastructure, and industrial projects across its home region. The ratings on GFH reflect our view on its stand-alone credit profile and do not incorporate any uplift for extraordinary external support. At the same time, we see that support from shareholders has been strong, even in the recent past.

"The negative implications of the CreditWatch placement reflect the uncertainties we see in relation to the execution of GFH's measures to improve its funding and fragile liquidity," said Mr. Karagoez.
We plan to resolve the CreditWatch placement within the next four weeks. We could affirm the ratings on GFH if, all other things being equal, we see that it is able to execute some of its planned transactions and secure a stronger funding and liquidity profile. On the other hand, we could downgrade GFH by more than one notch in particular if we see that the bank fails to execute these corrective measures in the near term.

Tougher Environment Weakens Financial Profile Of Gulf Banks And Pressures Their Credit Ratings, April 29, 2009
FI Criteria: Bank Rating Analysis Methodology Profile, March 18, 2004