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Global Credit Research - 08 Jun 2010
DIFC, June 08, 2010 -- Moody's Investors Service has today assigned first-time issuer
ratings of A1 (for long-term debt) and Prime-1 (for short-term
debt) to the Arab Petroleum Investments Corporation (APICORP).
The ratings have a stable outlook.
APICORP is a multilateral development bank (MDB), headquartered
in Saudi Arabia. It was created in 1974 and is owned by the ten
member states of the Organisation of Arab Petroleum Exporting Countries
(OAPEC). Its largest shareholders are the governments of Saudi
Arabia (rated Aa3), the United Arab Emirates (Aa2) and Kuwait (Aa2).
APICORP's mandate is to assist the development of member states'
hydrocarbon sectors through project loans, trade finance and direct
According to Moody's, APICORP's credit strengths include
shareholders' strong commitment to the organisation; a high-quality
asset portfolio; an established track record; and de facto preferred
creditor status. Credit challenges include a significant balance
sheet maturity mismatch; lower-rated shareholders than some
other MDBs; and a high degree of asset concentration. "Although
APICORP's level of capitalisation is relatively strong compared
to that of commercial banks, it is not as strong as that of other
MDBs that Moody's rates," says Tristan Cooper,
Moody's Head Analyst for Middle East Sovereigns.
In Moody's view, APICORP's ten shareholder governments
appear to be strongly committed to supporting the organisation as indicated
by three previous capital increases (in 1981, 1996, and 2003).
In 2008, APICORP's shareholders agreed to inject US$1
billion of deposits in order to offset some adverse effects from the global
financial crisis. So far, US$420 million of these
deposits have been received. Furthermore, APICORP's
shareholders have pledged to support the organisation on a "joint
and several" basis, although the wording of the pledge falls
short of a full financial guarantee for creditors.
"The performance of APICORP's assets is unusually robust compared
with other MDBs, with a reported weighted average credit quality
equivalent to Aa on Moody's rating scale," explains
Mr. Cooper. Around half of APICORP's loan assets are
covered by completion guarantees from project sponsors, most of
whom are government-owned oil companies. The highest breakeven
oil price for any of APICORP's projects is approximately US$35
per barrel. Moreover, APICORP's small number of non-performing
loans are fully provisioned.
Moody's also notes APICORP's well-established track
record. Since its creation in 1974, the organisation has
sustained many regional crises and periods of low oil prices without serious
difficulty. These include the oil price troughs of 1986 and 1999,
the Iran-Iraq war (1980 to 1988) and the 1990 Iraqi invasion and
occupation of Kuwait. "APICORP has never defaulted on any
of its obligations," underlines Mr. Cooper.
The shareholders of APICORP have conferred upon the organisation de facto
preferred creditor status, similar to that of other MDBs rated by
Moody's. This includes, within OAPEC countries,
an exemption from taxes, expropriation and currency convertibility
or transfer restrictions.
The rating agency points out that APICORP's most important credit
challenge is the maturity profile of its balance sheet. The bulk
of APICORP's liabilities are short-term (maturing in one
year or less), whereas the bulk of its assets are long-term
(with a maturity greater than one year). Although APICORP plans
to improve the structure of its liabilities over time, the maturity
profile will remain relatively skewed over the medium term. The
imbalance mainly derives from a funding reliance on short-term
deposits. Moody's notes that many of these deposits are "sticky"
in nature. Deposits from banks are more volatile, however,
and some were withdrawn in 2009 owing to the global financial turmoil.
Moody's estimates that the weighted average rating of APICORP's
shareholders is A3. This is lower than most other higher-rated
MDBs, many of which are backed by Aaa-rated governments.
The highest rated shareholders in APICORP are rated Aa2 (Kuwait,
the UAE and Qatar). Moody's assessment of shareholders'
ability to support is enhanced by the "joint and several"
undertaking in APICORP's establishing agreement. The rating
agency also recognises that the government of Saudi Arabia (Aa3) has a
particularly strong connection given that APICORP is headquartered there.
Given its mandate, APICORP's assets are necessarily concentrated
by geography and by sector --indeed, more concentrated than
those of most other Moody's-rated MDBs. Over 60%
of APICORP's loans are to entities in Saudi Arabia and Qatar (Aa2),
while around a third of total loans are to petrochemical projects.
Moody's recognises that this concentration is driven in large part
by supply -- after all, these are the countries and sectors
that have been most active in recent years. Nevertheless,
such concentration is a risk factor.
Given their supranational status, the vast majority of MDBs (including
APICORP) do not have access to central bank liquidity facilities.
Hence, MDBs typically have significantly higher levels of capital
adequacy than similarly rated commercial banks. Capital adequacy
is an especially pertinent rating factor in the case of APICORP given
the unbalanced maturity profile of its balance sheet. APICORP's
risk-weighted capital adequacy ratio was approximately 25 percent
at the end of 2009. According to its business plan, this
is expected to rise to around 30 percent by 2014. Although this
is stronger than most A-rated commercial banks, it is the
lowest ratio among MDBs rated by Moody's, including MDBs rated
Unlike many multilateral development banks, APICORP does not benefit
from explicit and quantified contractual support from its shareholders
in the form of callable capital. Although APICORP benefits from
a statutory commitment of its shareholders to support it on a 'joint
and several' basis, the terms of this commitment are ,
in Moody's view, too general and vague to provide the same
degree of protection for creditors that callable capital implies for other
APICORP's ratings were assigned by evaluating factors relevant to the
specific characteristics of multilateral development banks, reflecting
in particular their dual nature as financial institutions and vehicles
of international public policy. MDB rating factors include an assessment
of the stand-alone financial strength of the institution (in particular
its level of capitalization, liquidity, its risk management
framework and the quality of its assets), as well as the multiple
forms of support (including in contractual form) provided by the governments
that compose its membership. These attributes were compared against
other issuers both within and outside of APICORP's peer group of
multilateral development banks, and APICORP's ratings are believed
to be similar to other issuers of similar credit risk.
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Middle East Ltd.
Sovereign Risk Group
Moody's Investors Service
Moody's assigns A1 rating to APICORP
No Related Data.
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