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SOVEREIGN AND SUPRANATIONAL
CREDIT OPINION10 October 2019
Update
Analyst Contacts
Alexander Perjessy +971.4.237.9548VP-Senior [email protected]
Raphaele Auberty +33.1.5330.3414Associate [email protected]
Lucie Villa +33.1.5330.1042VP-Sr Credit [email protected]
Matt Robinson +44.20.7772.5635Associate Managing [email protected]
Marie Diron +65.6398.8310MD-Sovereign [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Arab Petroleum Investments Corporation -Aa2 stableUpdate following upgrade to Aa2 and change in outlook tostable
SummaryThe credit profile of Arab Petroleum Investments Corporation (APICORP) reflects its highcapital adequacy, supported by its moderate leverage, robust asset quality, low levels ofnonperforming assets, and an improving liquidity and funding profile, underpinned by thediversification of its funding sources and increasing availability of liquid resources to coverupcoming net cash outflows. APICORP's shareholder support is derived from the presence ofcallable capital, creditworthy shareholders and a strong enforcement mechanism.
Exhibit 1
APICORP’s credit profile is determined by three factors
Capital adequacy Liquidity and funding
aa3 aa3
Qualitative adjustments
0
Strength of member support
Medium
Preliminary intrinsic financial strength
aa3
Adjusted intrinsic financial strength
aa3
Rating range
Aa1-Aa3
Source: Moody's Investors Service
Credit strengths
» Strong capital adequacy, supported by high asset quality and asset performance
» Well-diversified funding structure
» Shareholder support from callable capital and a strong enforcement mechanism
Credit challenges
» Weaker liquidity position relative to peers, if deposits are counted as debt
» Exposure to a challenging geopolitical environment
MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Rating outlookThe stable outlook reflects our view that the corporation’s credit profile will remain supported by moderate leverage, high-qualitydevelopment-related assets, gradually improving liquidity metrics and access to callable capital, which underscores its shareholdersupport. In our assessment, the risks to APICORP’s asset performance, stemming primarily from the exposure to the regionalgeopolitical tensions and the pressures posed for the key borrower countries by the moderate oil price environment, are balanced bythe Corporation’s established resilience to these risks over the past years, improving development portfolio diversification and strongrisk management.
Factors that could lead to an upgradeA material increase in the availability of liquid resources to cover anticipated net cash outflows and/or significant strengthening ofmember support would support a higher rating, provided that the corporation also continues to maintain its strong capital adequacyposition and moderate leverage.
Factors that could lead to a downgradeA combination of the following factors would likely lead to a downgrade: (1) an extended period of very low oil prices or a regionalgeopolitical shock that would significantly impair asset quality; (2) possibly related, an increase in liquidity risk or the emergence offunding pressures, as a result of a protracted worsening of the operating environment; and/or (3) an indication that shareholders'willingness to support APICORP is weakening.
Key indicators
APICORP 2013 2014 2015 2016 2017 2018
Total Assets (USD million) 5,675.2 5,884.0 5,652.7 6,141.7 6,236.8 6,952.7
Development-related Assets (DRA) / Usable Equity [1] 252.7 244.5 235.7 260.4 255.3 272.4
Non-Performing Assets / DRA 1.5 1.6 1.5 1.3 1.2 0.5
Return on Average Assets 2.1 1.8 1.9 1.6 1.7 2.8
Liquid Assets / ST Debt + CMLTD [2] 1,020.0 256.3 -- 365.7 1,408.9 173.3
Liquid Assets / Total Assets 30.9 36.8 36.5 33.2 34.6 31.9
Callable Capital / Gross Debt 44.2 23.6 24.9 39.5 37.4 25.7
[1] Usable equity is total shareholder's equity and excludes callable capital.[2] ST debt excludes deposits. Including deposits would reduce the ratio to 113.9% in 2018. No short-term debt or long-term debt maturing for 2015.Source: Moody's Investors Service
Detailed credit considerationsAPICORP is a multilateral development bank (MDB) created and owned by the 10 member states of the Organization of ArabPetroleum Exporting Countries (OAPEC). OAPEC aims at developing an integrated petroleum industry among Arab countries, andAPICORP is its financial arm. The Corporation has never defaulted on any of its obligations despite periods of regional political turmoiland oil price volatility and benefits from a high proportion of its lending book being exposed to government or government-relatedborrowers in its member countries.
We assess APICORP's capital adequacy at “aa3”, supported by its robust capital position, high asset quality and strong assetperformance. APICORP's leverage ratio, which we use as the anchor in our assessment of the capital position, stood at 303% in 2018,which is above the median of Aa-rated MDBs, but still points to robust capital buffers. APICORP's capital position is further supportedby its high profitability, as highlighted by a return on average assets averaging 2.0% over 2016-18.
Development asset credit quality is robust, as illustrated by a weighted average borrower rating of Baa3. Nonperforming assetsrelative to development assets have traditionally been low, standing below 2% over the past five years and falling to 0.5% in 2018thanks to the settlement of nonperforming loans (NPLs) to Iraq (Caa1 stable) at the beginning of the year. The improvement in asset
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 onwww.moodys.com for the most updated credit rating action information and rating history.
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performance, and our expectations for nonperforming assets to settle at current levels, underpins our +3 adjustment for the trend ofasset performance.
Our final score of “aa3” is above the scorecard-indicated outcome of “a1”. This reflects the fact that outstanding guarantees, whichform part of the numerator in our calculation of the leverage ratio, include around $450 million of commitments to invest in a private-equity managed account, out of which the Corporation can opt out and therefore the amount does not represent an obligation akin toa legally enforceable guarantee. Excluding this commitment from guarantees, the leverage ratio would be lower at 283%.
We attribute a score of “aa3” to liquidity and funding, reflecting the availability of liquid resources and a well-diversified fundingstructure that has improved materially over the past four years. Available liquid assets relative to net cash outflows in a stressedscenario1 are robust, albeit below the Aa-rated median. Increased medium-term issuance in the international capital markets hasenabled the Corporation to significantly extend the maturity profile of its funding and allowed it to materially reduce its relianceon wholesale deposits, which accounted for only 14% of total funding in 2018, down from 45% in 2015, and did not fund anydevelopment-related assets. This has also helped eliminate APICORP's short-term maturity mismatches, which have been a key creditchallenge in the past.
Combining the capital adequacy and liquidity and funding scores, we position APICORP's preliminary intrinsic financial profile at “aa3”.Additional qualitative factors that we may consider include an institution's operating environment and the quality of its management.However, we do not apply any adjustment for these factors in the case of APICORP.
APICORP’s “Medium” strength of member support balances a weighted average shareholder rating of Ba1 and moderate callablecapital relative to debt against strong enforcement mechanisms and the importance of the bank's policy mandate for its shareholders.Members' willingness to support APICORP is underpinned by a pledge to support the Corporation on a “joint and several” basis(although the wording of this pledge falls short of a full financial guarantee for creditors). Its highest-rated members are the UnitedArab Emirates (Aa2 stable), Kuwait (Aa2 stable) and Qatar (Aa3 stable), which own a significant portion of the Corporation (44%combined). In addition, Saudi Arabia (A1 stable) owns 17%. This significant ownership by highly rated sovereigns indicates a strongability of the members to support APICORP financially, if necessary.
ESG considerationsHow environmental, social and governance risks inform our credit analysis of APICORPMoody's takes account of the impact of environmental (E), social (S) and governance (G) factors when assessing supranational issuers’credit profile. In the case of APICORP, the materiality of ESG to the credit profile is as follows:
Environmental considerations are not material to our assessment of APICORP’s credit profile. While the portfolio is concentratedon the oil and gas and petrochemical sector, which are exposed to carbon transition over the longer term, our assessment of theimplications of carbon transition for hydrocarbon exporting sovereigns indicates that pressure on the credit profiles will be limited andmaterialize very slowly, allowing these sovereigns to adjust at least partially, unless the pace of transition accelerates significantly. As aresult, the credit implications for APICORP are limited.
Social considerations are not material to our assessment of APICORP’s credit profile.
Governance is a key factor in our assessment of APICORP’s credit profile. The Corporation has a well-developed risk managementframework, as well as high governance standards.
All of these considerations are further discussed in the “Detailed credit considerations” section above. Our approach to ESG isexplained in our cross-sector methodology General Principles for Assessing ESG Risks. Additional information about our ratingapproach is provided in our Supranational Rating Methodology.
Recent developmentsDiversification of investor base supports APICORP's funding profileOver the past few years, APICORP has significantly diversified its funding base, having established itself as a regular, benchmark-sizeissuer of debt instruments in international markets from two of its global medium-term note programs (conventional and sukuk). In2018, APICORP also issued debt on the Chinese offshore market for the first time, becoming the first supranational institution in the
3 10 October 2019 Arab Petroleum Investments Corporation - Aa2 stable : Update following upgrade to Aa2 and change in outlook to stable
MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Middle East and Africa region to access this market, in addition to three debt issuances in the Taiwanese market during 2016, 2017 and2019. As of June 2019, around 45% of APICORP's funding was from international markets, outside the Middle East and North Africaregion.
APICORP's increased presence on the international debt markets has enabled the Corporation to lengthen the maturity of funding.As of June 2019, medium-term facilities accounted for more than 85% of the Corporation's total funding, pointing to a continuedlengthening of the maturity profile. Meanwhile, APICORP's reliance on short-term deposits for funding has reduced substantially. At theend of 2018, deposits accounted for less than 15% of total liabilities, down from nearly 45% in 2015.
The shift in the funding structure has also enabled APICORP to eliminate its negative short-term asset-liability gaps, which turnedpositive in 2017, at 6.5% of liabilities and have further improved since then.
Exhibit 3
Short-term maturity mismatches have been eliminatedCumulative asset-liability maturity gaps, percentage of total liabilities
-50
-40
-30
-20
-10
0
10
20
30
2010 2011 2012 2013 2014 2015 2016 2017 2018 H1 2019
Up to 3 months Up to 1 year Up to 5 years
Source: APICORP, Moody's Investors Service
High asset quality and improving asset performance support capital adequacy
Asset performance also improved substantially in 2018, as illustrated by a decline in nonperforming assets relative to developmentassets to 0.5% from 1.2% in 2017 (see Exhibit 4). This reflects the settlement of the long-standing NPLs to Iraq, amounting to $51million, in January 2018. The remaining NPLs largely consist of a loan to a single entity, and the Corporation has not accumulated newNPLs since 2015.
Equity investment will likely be the main source of potential new nonperforming assets over the coming years. APICORP adoptedIFRS9 accounting standards at the start of 2018, and therefore now records allowances for expected credit losses, against incurredlosses previously. Changes in the fair value of direct equity investments could therefore result in additional nonperforming assets. TheCorporation's equity investment portfolio has, however, declined as a share of total development-related assets, to 16.9% in 2018 from22.8% in 2015 (see Exhibit 4).
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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Exhibit 4
Exposure to equity investments has declinedExhibit 5
APICORP is gradually diversifying its loan portfolioLoans by region
10
12
14
16
18
20
22
24
0%
5%
10%
15%
20%
25%
2015 2016 2017 2018
Equity Investments, % DRA Number of Investments (rhs)
Sources: APICORP, Moody's Investors Service
88%
6%
2% 2%
2%
78%
10%
6%4%
2%
GCC North Africa Asia Americas Europe
2015
H1 2019
Sources: APICORP, Moody's Investors Service
APICORP is also seeking to diversify its portfolio. As of June 2019, Asia, the Americas and Europe accounted for 12% of the loanportfolio, up from 6% in 2015 (see Exhibit 5). APICORP is also increasing its equity investment exposures outside OAPEC, as illustratedby new equity investments in US-based companies in the first half of 2019. A degree of sectoral concentration is inevitable given theCorporation's mandate to finance energy-related projects mainly in OAPEC member states, but the Corporation is also increasing itsexposure to the utilities sector, especially renewables.
Geopolitical tensions are the main risk to asset qualityAPICORP is exposed to rising geopolitical risks in the Gulf, including those stemming from an escalation of tensions between the US(Aaa stable) and its allies, including Saudi Arabia, on one side, and Iran on the other. The attack on Saudi Arabian Oil Company's (SaudiAramco; A1 stable) Abqaiq and Khurais oil facilities in the eastern province of Saudi Arabia in September 2019 further highlight theregion's and oil sector's exposure to geopolitical risk.
Any long-term disruption of oil production in the Middle East, for instance related to the interruption of maritime traffic through theStrait of Hormuz, would affect APICORP's investment portfolio, given its exposure to Middle Eastern economies and governments thatrely heavily on oil and gas exports passing through the Strait of Hormuz. On the other hand, APICORP's borrowers would benefit fromhigher oil prices, improving debt service capacity of those that could continue to get their products to the market.
APICORP has a strong track record of maintaining robust profitability, even during times of geopolitical tensions or lower oil prices,benefiting from a well-diversified loan portfolio. In addition, around 3% of loans were insured against political risk at the end of June2019, mostly in countries outside of the membership group. Together with strong and improving risk management practices, this trackrecord balances the risk associated with elevated geopolitical tensions.
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Rating methodology and scorecard factors
Initial score Adjusted score Assigned score
Factor 1: Capital adequacy (50%) a1 aa3
Capital position (20%) baa1
Leverage ratio baa2
Trend 0
Impact of profit and loss on leverage +1
Development asset credit quality (10%) a
DACQ assessment a
Trend 0
Asset performance (20%) aaa
Non-performing assets aa3
Trend +3
Excessive development asset growth 0
Factor 2: Liquidity and funding (50%) aa3 aa3
Liquid resources (10%) baa1
Availability of liquid resources baa1
Trend in coverage outflow 0
Access to extraordinary liquidity 0
Quality of funding (40%) aa
Preliminary intrinsic financial strength aa3
Other adjustments 0
Operating environment 0
Quality of management 0
Adjusted intrinsic financial strength aa3
Factor 3: Strength of member support (+3,+2,+1,0) Medium Medium
Ability to support - weighted average shareholder rating (50%) ba1
Willingness to support (50%)
Contractual support (25%) ba2 baa3
Strong enforcement mechanism +2
Payment enhancements 0
Non-contractual support (25%) High
Rating range Aa1-Aa3
Rating Aa2
Rating factor grid - Arab Petroleum Investments Corp.
Note: 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. Additional considerations that may not be currently captured by the metrics used in the scorecard can be reflected in differences between the adjusted and assigned factor scores. 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 Multilateral Development Banks and Other Supranational Entities rating methodology.
Source: Moody's Investors Service
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Moody's related publications
» Rating Action: Moody's upgrades APICORP's to Aa2, changes outlook to stable, 10 October 2019
» Credit Analysis: Arab Petroleum Investments Corporation (APICORP) – Aa3 positive: Annual credit analysis, 25 October 2018
» Rating Methodology: Multilateral Development Banks and Other Supranational Entities, 25 June 2019
Endnotes1 The stressed scenario looks at net cash outflows over the next 18 months, under the assumption that the Corporation has no access to external funding,
experiences a deposit outflow, but continues its normal business operations.
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