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Rating Action:

Moody's upgrades APICORP to Aa2, changes outlook to stable

10 Oct 2019

Paris, October 10, 2019 -- Moody's Investors Service ("Moody's") has upgraded Arab Petroleum Investments Corporation's (APICORP) long-term issuer and senior unsecured rating to Aa2 and changed the outlook to stable from positive. APICORP's short-term issuer rating was affirmed at Prime-1.

The key drivers for the upgrade include the steady improvement that the corporation, the multilateral development bank owned by the member states of the Organization of Arab Petroleum Exporting Countries, has made in its liquidity and funding profile by diversifying its funding sources. This has allowed APICORP to significantly reduce its reliance of short-term wholesale deposits and eliminate short-term asset-liability mismatches. The upgrade also takes into account the building track record of strong development-related asset performance, reflected in a substantial reduction of the nonperforming assets (NPA) during the past three years. Moody's expects the higher quality of funding and very strong asset performance to stay.

The stable outlook reflects Moody's view that the corporation's creditworthiness will be supported by moderate leverage, high-quality development-related assets, further improvements in liquidity metrics and access to callable capital which underlines its shareholder support. The risks due to the challenging operating environment in a number of countries where APICORP operates, stemming mostly from the regional geopolitical tensions and the pressures posed by the moderate oil price environment, are balanced by the corporation's proven resilience to these risks over the past four years, the trend towards greater diversification of its portfolio, as well as its strong and improving corporate governance and risk management practices.

Concurrently, Moody's also upgraded APICORP's senior unsecured MTN rating to (P)Aa2, the backed senior unsecured rating of APICORP Sukuk Limited to Aa2, and the backed senior unsecured MTN rating of APICORP Sukuk Limited to (P)Aa2. 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.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO Aa2

STEADY IMPROVEMENTS IN THE LIQUIDITY AND FUNDING PROFILE TO BE SUSTAINED

Over the past four years APICORP has diversified its funding options, with offerings in multiple products, currencies and jurisdictions, reaching out to a well-diversified investor base in international capital markets. It has established and tapped two international medium-term notes programs (conventional and sukuk), issued multiple floating rate notes in the Taiwanese market and tapped the Dim Sum bond market in addition to continuing to access medium-term funding through bilateral and syndicated loans. Close to half of APICORP's investor base now lies outside the Gulf Cooperation Council states.

Increased medium-term issuance has enabled the corporation to significantly extend the maturity profile of its funding and allowed it to materially reduce its reliance of wholesale deposits, to less than 15% of total liabilities in 2018 from nearly 45% in 2015. In turn, this has allowed APICORP to eliminate previous short-term asset-liability mismatches starting in 2017. Moody's expects APICORP to maintain a broadly stable funding structure, avoiding maturity mismatches to emerge again.

Furthermore, APICORP's liquid asset coverage of estimated net cash outflows over the upcoming 18 months has been steadily improving since 2016, increasing to 157% in June 2019 from 63% in 2018 and around the same level in 2017, part of which was achieved through the rebalancing of the treasury assets portfolio towards a higher share of securities rated A2 and higher. The corporation also made progress in diversifying the treasury portfolio away from the key borrower countries, with the share of Middle East and North Africa (MENA) treasury assets declining to 67% in June 2019 from 71% in 2018 and 87% in 2015. Moody's expects further treasury portfolio rebalancing and diversification to broadly sustain the improvements in the current liquid asset coverage of the upcoming net cash outflows in the next few years. The corporation is targeting to maintain this coverage above 100%.

TRACK RECORD OF STRONG ASSET PERFORMANCE

In addition to strong profitability, which the corporation has consistently maintained over the years despite a challenging operating environment, APICORP's strong capital adequacy is supported by an improving trend in development-related asset performance. This reflects formation of no new non-performing loans during the past three years and the settlement of legacy non-performing loans with high recovery rates during 2018. This has reduced the nonperforming asset (NPA) ratio to 0.5% of development-related assets in 2018 from 1.2% in 2017 and 1.5% in 2015. Moody's expects that the NPA ratio will remain very low in the next few years.

In general, Moody's expectation of continued strong asset performance also reflects its assessment of the corporation's prudent risk management practices, the fact that more than 85% of the loan book exposure is to governments or government-related entities, and a relatively low and declining borrower concentration with the top ten largest exposures accounting for around 25% of development-related assets.

In Moody's view, the main source of upside risk to the NPA ratio in the next few years lies in potential losses on the corporation's direct equity investments, measured as declines in the estimated fair value of the direct equity portfolio under the IFRS9 accounting standard adopted by APICORP since January 2018. However, the share of direct equity has declined below 17% of development-related assets in 2018 from 19.4% in 2017 and 22.8% in 2015. Moreover, a significant share of this portfolio reflects ownership in blue-chip companies which have been a very profitable dividend-generating investment for APICORP over the years, pointing to a relatively low risk of losses in the future. Furthermore, the corporation has recently started to implement strategic exits from long-term investments, which in 2018 nearly doubled APICORP's net income. Moody's expects similar exits in the coming years, which will support the corporation's profitability and capital adequacy.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on APICORP's Aa2 rating reflects Moody's view that the corporation's creditworthiness will remain supported by moderate leverage, high-quality development-related assets, gradually improving liquidity metrics and access to callable capital, which underscores its shareholder support.

Moody's expects that steady growth in the loan portfolio and a restrained expansion of the direct equity portfolio will keep APICORP's leverage moderate in the medium term. Meanwhile, in Moody's view, further diversification and rebalancing of the corporation's treasury asset portfolio will contribute to increase in the availability of liquid assets.

In Moody's assessment, the risks to APICORP's asset performance, stemming primarily from the exposure to the regional geopolitical tensions and the pressures posed for the key borrower countries by the moderate oil price environment, are balanced by the corporation's established resilience to these risks over the past years, the trend towards reducing the concentration of the development-related portfolio, as well as the corporation's strong and improving corporate governance and risk management practices.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to Moody's assessment of APICORP's credit profile. While the portfolio is concentrated on the oil and gas and petrochemical sector, which are exposed to carbon transition over the longer term, Moody's assessment of the implications of carbon transition for hydrocarbon exporting sovereigns indicates that pressure on the credit profiles will be limited and materialize very slowly, allowing these sovereigns to adjust at least partially, unless the pace of transition accelerates significantly. As a result, the credit implications for APICORP are limited.

Social considerations are not material to Moody's assessment of APICORP's credit profile.

Governance is a key factor in Moody's assessment of APICORP's credit profile. The corporation has a well-developed risk management framework, as well as high governance standards.

FACTORS THAT COULD LEAD TO AN UPGRADE

A material increase in the availability of liquid resources to cover anticipated net cash outflows and/or significant strengthening of member support would support a higher rating, provided that the corporation also continues to maintain its strong capital adequacy position and moderate leverage.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A combination of the following factors would likely lead to a downgrade: (1) an extended period of very low oil prices or a regional geopolitical shock that would significantly impair asset quality; (2) possibly related, an increase in liquidity risk or the emergence of funding 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.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in June 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

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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.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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