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Rating Action:

Moody's changes outlook on APICORP to positive, affirms Aa3 rating

18 Oct 2018

NOTE: On October 19, 2018, the press release was corrected as follows: In the fourth paragraph of the press release, the third sentence was changed to “APICORP's short-term issuer rating is affirmed at Prime-1.” Revised release follows.

Frankfurt am Main, October 18, 2018 -- Moody's Investors Service ("Moody's") has changed the outlook on Arab Petroleum Investments Corporation (APICORP) to positive from stable and affirmed APICORP's long-term issuer and senior unsecured rating at Aa3.

The key driver of the outlook change to positive reflects progress that APICORP, the multilateral development bank (MDB) owned by the member states of the Organization of Arab Petroleum Exporting Countries (OAPEC), continues to make in reducing balance sheet maturity mismatches and its reliance on wholesale deposits in its funding mix by diversifying and lengthening its funding profile.

APICORP's Aa3 rating remains supported by very high capital adequacy, improving asset quality, and very high strength of member support. While robust and improving, APICORP's liquidity position nevertheless continues to be constrained by the less liquid nature of some of its treasury investment assets and their exposure to borrower risk. Meanwhile, APICORP's high concentration of operational assets in the oil and gas sector and in the Arab region, in accordance with the corporation's mandate to finance petroleum projects and industries that benefit its member states, presents potential challenges should oil prices remain low over a protracted period of time and/or APICORP's borrowers and shareholders face economic, geopolitical and security challenges.

In the same rating action, Moody's also affirmed APICORP's senior unsecured MTN rating at (P)Aa3, the senior unsecured rating of APICORP Sukuk Limited at Aa3, and the senior unsecured MTN rating of APICORP Sukuk Limited at (P)Aa3. APICORP Sukuk Limited is a special purpose vehicle set up by APICORP for sukuk issuance, whereby sukuk investors (certificate holders) are exposed to the senior unsecured credit risk of APICORP. APICORP's short-term issuer rating is affirmed at Prime-1.

RATINGS RATIONALE

RATIONALE FOR THE POSITIVE OUTLOOK

REDUCED RELIANCE ON WHOLESALE DEPOSITS SUPPORTS IMPROVING LIQUIDITY PROFILE

APICORP has continued to actively diversify and lengthen the maturity profile of its funding sources in recent years. Whereas short-term borrowings, including wholesale deposits, averaged 60% of liabilities in 2010-2013, that share had fallen to 45% in 2015 and further to 33% in 2017. Meanwhile, wholesale deposits declined to less than 85% of liquid treasury assets, implying that, in contrast with past patterns, APICORP's loan book and the direct investment portfolio are no longer funded by short-term deposits. A track record of lower reliance on wholesale deposits would point to a stronger liquidity profile.

Moreover, over the past several years, more than two-thirds of all wholesale deposits have remained stable -- defined as deposits with at least three years of consecutive renewal -- which indicates a relatively low risk of large deposit withdrawals posed to the overall liquidity position. Furthermore, a large majority of these deposits (70% in 2017) originated from government or government-related entities in the member countries, which underscores Moody's expectation that they will remain stable in the coming years.

MATERIALLY REDUCED BALANCE SHEET MATURITY MISMATCHES

Improvements in the funding profile also reduced balance sheet maturity mismatches, a credit-positive trend which Moody's expects APICORP to maintain. In the past, APICORP's short-term assets have been insufficient to cover same-maturity liabilities, which was reflected in a 0-12 month cumulative asset-liability mismatch ranging between 5% and 25% of total liabilities during 2012-2016. This gap was eliminated during 2017 and, at the end of 2017, the corporation's short-term assets exceeded short-term liabilities to the tune of 6.5% of total funding.

Given APICORP's long-dated bond issuance during 2018 and the scheduled debt repayment profile, Moody's expects that APICORP's short-term asset-liability gap will remain positive at the end of 2018. Similar to a track record of lower reliance on wholesale deposit funding for operational activities, maintenance of a positive maturity gap would support a higher assessment regarding the strength of APICORP's liquidity profile.

RATIONALE FOR THE Aa3 RATING AFFIRMATION

The affirmation of the Aa3 rating is supported by ongoing credit strength in a very high capital position and very high member support, balanced by some geographic and sectoral concentration of assets that exposes APICORP to local shocks.

Despite a challenging operating environment, APICORP's capital adequacy has remained very high, supported by a strong capital position, moderate leverage, and low levels of non-performing assets.

Notwithstanding lower oil prices since 2014, the corporation has maintained healthy profitability -- with return on assets and net interest margin averaging 1.7% and 1.1%, respectively, over the three years to 2017 -- allowing it to accumulate capital through retained earnings while also paying dividends in the 2015 and 2017 financial years. As of end-2017, APICORP's three-year average asset coverage ratio (usable equity divided by the sum of gross loans, equity investments, and risk-weighted treasury assets) was 50.5%, up slightly from 49.6% in 2016 and 49.0% in 2015, which is similar to the median of Aa-rated peers.

APICORP's three-year average debt-to-equity ratio of 119% at the end of 2017 is manageable, in Moody's view, and in line with the median for Aa-rated MDBs, although this ratio does not include the corporation's deposit liabilities. If those were included, the ratio would weaken to about 187%, higher than the peer median.

APICORP's loan book and direct equity investments exhibit high sector and regional concentration on petroleum- and energy-related projects in OAPEC states. This high concentration of operational assets in the oil and gas sector presents challenges should oil prices remain low over a protracted period of time and/or APICORP's borrowers and shareholders face economic, geopolitical and security challenges.

Nevertheless, profitability of the corporation has not been affected materially by significantly lower oil prices during 2015-2017, while non-performing loans (NPL) have actually declined to 2.0% in 2017 from 2.4% in 2014. Based on a settlement of a legacy NPL during 2018, we expect that APICORP's NPL ratio will decline below 0.5% by the end of 2018 -- in line with similarly rated peers. Moreover, in the recent years, APICRORP has been actively reducing its country and sector concentration, within its mandate, through investments outside the OAPEC region and into industries that have low or negative correlation with oil prices, e.g. utilities, renewables, and commodity trading.

APICORP's very strong shareholder support is reflected in the shareholders commitment to provide callable capital, which has been pledged on a joint and several basis and doubled to the level of paid-in capital during 2016. APICORP also enjoys strong indirect shareholder support through wholesale deposits from government and government-related institutions in the member countries that have remained broadly stable despite a challenging operating environment of the last three years. The favorable settlement of a legacy nonperforming loan in early 2018 also reflects the strength of indirect support from shareholders.

WHAT COULD CHANGE THE RATING UP

Extending the track record of (1) reduced reliance on wholesale deposits (so that they do not materially contribute towards funding APICORP's lending and direct investment operations) and (2) minimal balance sheet maturity mismatches could prompt an upgrade, provided that the corporation also continues to maintain its strong capital adequacy position and manageable leverage. Sustained credit metrics around the current levels over the next 12-18 months and further reduction in the concentration of APICORP's lending portfolio over the longer term would support a higher rating level.

WHAT COULD MOVE THE RATING DOWN

Given the positive outlook a downgrade is unlikely, but could be triggered by a combination of the following factors: (1) an extended period of very low oil prices or a regional political shock that would significantly impair asset quality; (2) an indication that shareholders willingness to support APICORP was weakening; and (3) liquidity risk increase or any funding pressures emerge as a result of a worsening of the operating environment. Reversal in recent positive trends supporting APICORP's asset and liquidity profile could prompt stabilization of the outlook at the current rating level.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for these ratings is Alexander Perjessy , +971 (423) 795-48.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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