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SOVEREIGN AND SUPRANATIONAL
CREDIT OPINION27 April 2020
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
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EMEA 44-20-7772-5454
Arab Petroleum Investments Corporation -Aa2 stableRegular update
SummaryThe credit profile of Arab Petroleum Investments Corporation (APICORP) reflects itshigh capital adequacy, supported by moderate leverage, robust asset quality, low levelsof nonperforming assets, and a very strong liquidity and funding profile, underpinnedby diversified funding sources and increased availability of liquid resources to coverupcoming net cash outflows. APICORP's shareholder support is derived from the presenceof callable capital, creditworthy shareholders and a strong enforcement mechanism. Thecoronavirus outbreak and the related oil price shock pose risks to asset performance, but theCorporation's track record of resilience to shocks and strong quality of management mitigatesome of these risks.
Exhibit 1
APICORP’s credit profile is determined by three factors
Capital adequacy Liquidity and funding
a2 aa2
Qualitative adjustments
0
Strength of member support
High
Preliminary intrinsic financial strength
a1
Adjusted intrinsic financial strength
a1
Scorecard-Indicated Outcome Range
Aa1-Aa3
Source: Moody's Investors Service
Credit strengths
» Strong capital adequacy, supported by high asset quality and strong asset performance
» Strong liquidity and 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, strong liquidity metrics and access to callable capital, which underscores its shareholder support. In ourassessment, the risks to APICORP’s asset performance, stemming primarily from the exposure to the regional geopolitical tensionsand the pressures posed for the key borrower countries by the coronavirus outbreak and the oil price shock, are balanced by theCorporation’s demonstrated resilience to a challenging operating environment over the past years, increasing development portfoliodiversification, and strong risk management.
Factors that could lead to an upgradeA material improvement in the capital adequacy position would support a higher rating, provided that the corporation also continuesto maintain a high level of liquid resources to cover anticipated net cash outflows and its strong member support.
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 2014 2015 2016 2017 2018 2019
Total Assets (USD million) 5,884.0 5,652.7 6,141.7 6,236.8 6,952.7 7,349.4
Development-related Assets (DRA) / Usable Equity [1] 244.5 235.7 260.4 255.3 253.1 270.1
Non-Performing Assets / DRA 1.6 1.5 1.3 1.2 0.5 1.7
Return on Average Assets 1.8 1.9 1.6 1.7 2.8 1.6
Liquid Assets / ST Debt + CMLTD [2] 256.3 -- 365.7 1,408.9 174.7 386.5
Liquid Assets / Total Assets 36.8 36.5 33.2 34.6 32.2 34.0
Callable Capital / Gross Debt 23.6 24.9 39.5 37.4 25.5 22.7
[1] Usable equity is total shareholder's equity and excludes callable capital.[2] ST debt excludes deposits. Including deposits would reduce the ratio to 221.3% in 2019. 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 “a2”, supported by its robust capital position, high asset quality and solid assetperformance. APICORP's leverage ratio, which we use as the anchor in our assessment of the capital position, stood at 292% in 2019,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 2017-19.
Development asset credit quality is robust, as illustrated by a weighted average borrower rating of Baa3. Nonperforming assets relativeto development assets have traditionally been low, standing below 2% over the past five years and falling to 0.5% in 2018 thanks tothe settlement of nonperforming loans (NPLs) to Iraq (Caa1 stable) at the beginning of that year. Nonperforming assets rose to 1.7% in2019, which is reflected in our asset performance assessment at “a2”. This reflected rising equity impairment as APICORP undertook a
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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review exercise of all its equity investments, leading to downward adjustments in fair value of the direct equity portfolio under IFRS 9standards. In contrast, nonperforming loans remained low, accounting for less than 0.4% of gross loans.
We attribute a score of “aa2” to liquidity and funding, reflecting the availability of liquid resources and a well-diversified fundingstructure that has improved materially over the past five years. Available liquid assets relative to net cash outflows in a stressedscenario1 increased substantially in 2019 and are robust, albeit below the Aa-rated median. Increased medium-term issuance in theinternational capital markets has enabled the Corporation to significantly extend the maturity profile of its funding and allowed itto materially reduce its reliance on wholesale deposits, which accounted for less than 10% of total funding in 2019, down from 14%in 2018 and 44% in 2015, and did not fund any development-related assets. This has also helped eliminate APICORP's short-termmaturity mismatches, which have been a key credit challenge in the past.
Combining the capital adequacy and liquidity and funding scores, we position APICORP's preliminary intrinsic financial profile at “a1”.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 “High” strength of member support balances a weighted average shareholder rating of Ba1 and very high callable capitalrelative to debt against strong enforcement mechanisms, as well as 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 RUR-) 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.
The capital increase announced on 20 April 2020 will result in callable capital increasing to $8.5 billion, from $1.0 billion. The capitalincrease was ratified by the General Assembly, and took effect immediately. This will lead to a callable capital to total debt ratio, ourkey indicator for assessing contractual support, well above 100% once it is reflected in the Corporation's financials, from H1 2020onwards. As a result, we assign a “High” score for strength of member support, above the adjusted score of “Medium” based on 2019financials.
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.
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Recent developments2019 financial results point to continued profitability, improving funding structureIn financial year 2019, APICORP continued to record robust asset growth and strong profitability. Assets expanded by 5.7% in 2019,which reflects both strong growth in lending (+4.8% in gross terms) and a significant increase in liquid assets (+11.5%). Over the sameperiod, equity investments declined by 6.1% and account now for around 15% of development-related assets, down from 23% in 2015.This reflects the Corporation's strategy to maintain a measured approach towards its equity business.
APICORP's strong profitability continued to support the expansion of the Corporation equity base. APICORP posted a net profit of$111.9 million. While net profit is down from $182.3 million in financial year 2018, that year's exceptional profit partly reflected asuccessful long-term direct equity investment in the UAE-based National Petroleum Service (NPS), which netted $86.7 million ofrealized gains. Excluding the NPS sale, net profit increased by 17% in 2019. As a result, APICORP recorded a return on average assets of1.6%, which is broadly in line with previous years.
Strong profitability continues to enable the Corporation to expand its equity base, which increased by 3.6% in 2019 through retainedearnings and reserves. Meanwhile, liabilities increased by 6.7%, with a continued improvement in the Corporation's funding profile. In2019, APICORP continued to reduce its reliance on wholesale deposits, which now account for less than 10% of total funding, downfrom 14% in 2018 and an average of 60% between 2010 and 2013. Instead, APICORP is increasingly reliant on debt instruments ininternational markets, in multiple currencies and multiple markets. As a result, APICORP has extended its track record of no short-termmaturity mismatches to three years in a row.
Asset performance remained strong in 2019, but deteriorated relative to 2018 with nonperforming assets increasing to 1.7% of totaldevelopment-related assets from 0.5% in 2018. Nonperforming loans increased only slightly to $14.7 million in 2019 from $12.5million in 2018, but accounted for only 0.4% of gross loans. In contrast, equity investment was the main source of new nonperformingassets in 2019, due to changes in the fair value of direct equity investments after the Corporation undertook an independent reviewexercise of its entire direct equity portfolio.
Coronavirus pandemic poses downside risks to asset performanceThe outbreak of the coronavirus pandemic, combined with the related sharp decline in oil prices, poses downside risks to APICORP'sasset performance. APICORP's development assets are concentrated in the energy sector (47% of development-related assets in 2019),which is in line with the Corporation's mandate to finance energy-related projects mainly in OAPEC member states. This exposes theperformance of APICORP's portfolio to oil market fluctuations.
Nevertheless, APICORP has a proven track record of maintaining robust profitability even during times of geopolitical tensions or loweroil prices, which is at least partly due to strong and improving risk management. While the current challenging global and regionalenvironment is likely to weigh on the Corporation's asset performance, the fact that government and government-sponsored loansaccount for more than 85% of the loan portfolio will mitigate some of these risks.
Approved capital increase points to strong willingness to support APICORPOn 20 April 2020, APICORP announced that its General Assembly ratified a very substantial capital increase, with immediate effect forimplementation. Paid-in capital was increased by $500 million, to $1.5 billion, through a transfer of retained earnings, while callablecapital was increased to $8.5 billion from $1 billion. The capital increase underscores shareholders' strong willingness to support theCorporation. Following the capital increase, we expect that callable capital will cover more than 100% of total debt, which is one of thekey ratios we use to assess contractual willingness to support an MDB.
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Rating methodology and scorecard factors
Initial score Adjusted score Assigned score
Factor 1: Capital adequacy (50%) a2 a2
Capital position (20%) a3
Leverage ratio baa1
Trend 0
Impact of profit and loss on leverage +1
Development asset credit quality (10%) a
DACQ assessment a
Trend 0
Asset performance (20%) a2
Non-performing assets a2
Trend 0
Excessive development asset growth 0
Factor 2: Liquidity and funding (50%) aa2 aa2
Liquid resources (10%) aa3
Availability of liquid resources aa3
Trend in coverage outflow 0
Access to extraordinary liquidity 0
Quality of funding (40%) aa
Preliminary intrinsic financial strength a1
Other adjustments 0
Operating environment 0
Quality of management 0
Adjusted intrinsic financial strength a1
Factor 3: Strength of member support (+3,+2,+1,0) Medium High
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
Scorecard-Indicated Outcome Range Aa1-Aa3
Rating Assigned Aa2
Rating factor grid - Arab Petroleum Investments Corp.
Note: Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results are helpful in understanding patterns and trends of an issuer’s performance
as well as for peer comparisons. Additional considerations that may not be captured when historical metrics are used in the scorecard may be reflected in differences between the adjusted and assigned factor scores.
Furthermore, in our ratings we often incorporate directional views of risks and mitigants in a qualitative way. 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
» Credit Analysis: Arab Petroleum Investments Corporation (APICORP) – Aa2 stable: Annual credit analysis, 21 October 2019
» Rating Action: Moody's upgrades APICORP's to Aa2, changes outlook to stable, 10 October 2019
» 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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