(apicorp) - aa3 stable arab petroleum investments corporation · as of 2015, apicorp’s largest...

SOVEREIGN AND SUPRANATIONAL

ISSUER IN-DEPTH5 October 2016

RATINGS

APICORPRating

Long-TermIssuer Rating

Aa3/STA

Short-TermIssuer Rating

P-1

TABLE OF CONTENTSOverview and Outlook 1Organizational Structure andStrategy 2Rating Rationale 5Capital Adequacy: High 5Liquidity: High 10Strength of Member Support: High 13Rating Range 15Comparatives 16Rating History 17Annual Statistics 18Moody’s Related Research 20Related Websites and InformationSources 20Authors 20

Contacts

Steffen Dyck 49-69-70730-942Senior Credit [email protected]

Matt Robinson 44-20-7772-5635Vice President -Senior Credit Officer/[email protected]

Marie Diron 65-6398-8310Senior Vice President/[email protected]

Atsi Sheth 65-6398-3727MD-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(APICORP) - Aa3 StableAnnual Credit Analysis

Overview and OutlookAPICORP is a multilateral development bank (MDB) wholly owned by the 10 member statesof the Organization of Arab Petroleum Exporting Countries (OAPEC). We affirmed its Aa3long-term and Prime-1 short-term issuer ratings on 23 September 2016. The ratings balancestrong capital adequacy, a high-quality investment asset portfolio, de facto preferred creditorstatus and strong shareholder support against high geographic and sector concentrationrelative to peers. The rating outlook is stable.

APICORP has maintained a high level of equity relative to its risk assets, and itscorresponding capital adequacy ratios exceed regulatory guidelines, specifically those ofthe Central Bank of Bahrain, where the Corporation maintains a wholesale banking branch.Relatively low leverage also contributes to APICORP’s high intrinsic financial strength.

The strong track record of profitability has bolstered the capital base over time. After a6.3% decline in net income in 2014, income growth resumed in 2015 at 2.4%. Efforts todiversify its funding sources are ongoing and there was a further moderation of the short-term maturity gap in 2015. Nevertheless, the degree to which the Corporation continues tobe reliant on wholesale deposits adversely affects our assessment of its liquidity.

The sharp drop in global oil prices since mid-2014 poses a credit challenge, given theCorporation's concentration on the oil and gas sector. Similarly, APICORP has faced achallenging operating environment given political turmoil in a number of member countriessince 2011. In addition, geopolitical risks—notably those related to armed conflict—havebecome more prominent. That said, asset quality and capital adequacy have not beenmaterially impacted yet. Conversely, an improvement in the operating environment wouldbe credit positive.

This Credit Analysis elaborates on APICORP's (Aa3 stable) credit profile in terms of CapitalAdequacy, Liquidity and Strength of Member Support, which are the three main analyticalfactors in Moody’s Supranational Rating Methodology.

This Credit Analysis provides an in-depth discussion of credit ratings for the APICORP andshould be read in conjunction with Moody’s most recent Credit Opinion and rating informationavailable on Moody's website.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1030109

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MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

2 5 October 2016 Arab Petroleum Investments Corporation (APICORP) - Aa3 Stable: Annual Credit Analysis

Organizational Structure and StrategyAPICORP is an OAPEC company

APICORP was established as an MDB on 23 November 1975 in accordance with an international agreement (“Establishing Agreementof APICORP”) signed and ratified by the ten member states of the OAPEC.1

Exhibit 1 shows the distribution of fully paid-in capital, with the largest shareholders being the governments of Saudi Arabia (A1 stable),the United Arab Emirates (Aa2 negative) and Kuwait (Aa2 negative). APICORP’s headquarters are located in Dammam, Saudi Arabia,and it has a wholesale banking branch in Manama, Bahrain.

Exhibit 1

APICORP's shareholding structureFully paid-in capital shares (as of 31 December 2015)

Note: Sovereign ratings in brackets are as of 5 October 2016.Sources: APICORP, Moody's Investors Service

APICORP is independent in its administration and in the performance of its activities. Unlike many other MDBs, it carries out itsoperations on a commercial basis, in accordance with its statutes. APICORP allocates 10% of annual net income to its statutory reserveand has the option of distributing the remainder as dividends to its shareholders. There is no dividend policy in place and dividenddistribution is mainly driven by surplus liquidity considerations. The Corporation has not paid out dividends in six out of nine yearssince 2008. Dividends were paid in 2008, 2012, and 2016.

The Establishing Agreement of APICORP explicitly grants the Corporation privileges throughout OAPEC member countries. Theseprivileges include (1) the pledge and undertaking to support APICORP, jointly and severally; (2) the granting of rights and privileges ofnationality within any member country of OAPEC; (3) support for APICORP’s personnel in entry and residency throughout OAPEC;(4) exemption from payment of duties and all public and financial costs within OAPEC; (5) protection of assets against appropriation;(6) immunity from political risks; and (7) exemption from currency controls, including from convertibility and transfer restrictions.Membership in APICORP is explicitly limited to member countries of OAPEC, and any country that withdraws its membership fromOAPEC is obliged to withdraw from APICORP.

Fulfills mandate through lending and equity investment operations

APICORP’s mandate is to assist in financing petroleum projects and industries, and associated fields of activity of OAPEC members inorder to strengthen member states’ economic and financial potential. In order to achieve its purpose, APICORP makes direct equityinvestments in (16% of total assets as of year-end 2015) and extends debt financing (“Corporate Finance” loans, 44% of assets) tolocal, regional, and international entities in the energy and petrochemical sectors, as well as the trading activities of first-tier Arabexporters and global traders with creditworthy importing countries.

APICORP may conduct investments or financing proposals located outside the Arab region if it sees potential association with theinterest and development of the wider energy industry in the Arab region. The rest of the assets consist of cash and cash equivalents,



bank deposits, property and equipment, and are invested in liquid instruments. APICORP also provides advisory related to oil and gasfinance and project development, and publishes macro-economic research with a focus on the oil and gas sector.

APICORP’s development mandate and its multilateral shareholding structure are typical of most MDBs. But it differs from otherhighly-rated MDBs in that it fulfils its mandate by investing in the private sector, although a significant portion of its assets is indirectlyassociated with governments, through government-owned entities. We therefore consider APICORP’s business model slightly morevulnerable compared to most other MDBs, whose assets are largely characterized by direct sovereign exposure. The high concentrationof assets in the oil and gas sector is also a difference between APICORP and some other MDBs.

In the context of heightened country risk in the Middle East, the Corporation’s strategy for its Project & Trade Finance loans is tomaintain the current volume and contain the average maturity of its loan portfolio, while shifting focus to advisory services and trade/commodity finance. APICORP will focus trade/commodity finance activity on the Gulf Cooperation Council (GCC) countries.

According to its five-year business plan, loan growth will be moderate. Some of this growth will be done in partnership with otherlarge MDBs. APICORP has well-established co-financing relationships with the European Investment Bank (EIB), International FinanceCorporation (IFC), and the Islamic Development Bank (IsDB) and is working towards broadening its relationships with the EuropeanBank for Reconstruction and Development (EBRD) and the African Development Bank (all rated Aaa).

Regarding its equity operations, APICORP’s strategy is to grow and diversify investments. Compared to its 2012 level of $318 million,equity investments have more than doubled in 2013, to $822 million, although most of this increase was the result of portfoliorevaluation. Equity investments continued to rise further, hitting $923 million in 2015 or approximately 37% of loan operations.Consequently, the Corporation has added to its personnel to handle the increased volume. It also usually partners with publicinstitutions and aims at occupying at least one seat on the Board of the investee, although with a planned exit strategy.

In 2012, APICORP established its Petroleum Shipping Fund as part of its diversification strategy.2 In 2013, it acquired a 5.86% stake inthe Industrialization & Energy Services Company (TAQA, unrated), a Saudi-based holding company that expands APICORP’s footprintin the region’s midstream and downstream petroleum sectors.

In 2014, it expanded its footprint in the midstream and downstream sectors of its member countries’ energy industry by acquiring a28.3% stake in Dubai-headquartered National Petroleum Services (NPS, unrated). It also made its first investment in the power sectorvia a co-investment agreement with Saudi-based ACWA Power (unrated), and contributed to Powervest Fund (unrated), a Shariah-compliant specialized infrastructure fund, also located in Saudi Arabia.

APICORP continues to diversify its investments. In April, the Corporation announced that it had acquired together with UK privateequity firm Buckthorn Partners (unrated) Ashtead Technology (unrated), a leading independent provider of sub-sea equipment andservices to the offshore oil and gas industry, with operations in the UK, Houston and Singapore. In July, APICORP announced the launchof a $1.5 billion Shipping Fund, together with the National Shipping Company of Saudi Arabia (Bahri, unrated). This will be APICORP'ssecond shipping fund following the launch of APICORP Petroleum Shipping Fund in February 2013. Total investments of up to $1.5billion are composed of debt and equity to acquire 15-18 Very Large Crude Carriers over three consecutive phases. APICORP will invest85% of the equity and Bahri will invest the remaining 15%. However, APICORP is planning to sell down the bulk of its equity stake ineach phase which together with securing the required debt funding for each phase is a pre-requisite to move to the next phase and willmitigate the risks which would be associated with a fully upfront equity stake.

As of 2015, APICORP’s largest equity holding is Saudi European Petrochemical Company (Ibn Zahr), a polypropylene manufacturermajority-owned by Saudi Basic Industries Corporation (SABIC, A1 stable), at a book value of $464 million, or 50.3% of all theCorporation’s equity investments (see Exhibit 2).



Exhibit 2

APICORP’s direct equity investments, as of 31 December 2015

Note: Yansab is the only listed company. Direct equity investments are measured at fair value, except in case of certain unlisted companies where reliable fair value measures are notavailable; those are carried at cost less impairment allowances (if any).Source: APICORP

Wholesale deposit operations position APICORP as a unique MDB

APICORP, unlike most MDBs, accepts wholesale deposits. The few other Moody’s-rated MDBs that take deposits – Corporacion Andinade Fomento (CAF, Aa3 stable), Central American Bank for Economic Integration (CABEI, A1 stable), Fondo Latinoamericano de Reservas(FLAR, Aa2 stable) – take the deposits primarily from shareholders, and they do not use the deposits as a source of funding for theirbanking operations. The African Export-Import Bank (Afrexim, Baa2 stable) has also introduced a deposit facility in late 2015 which canserve as cash collateral facility to fund trade finance operations on the asset side.

APICORP’s business model differs from other MDBs, while sharing some characteristics with commercial banks in that it uses wholesaledeposits to fund: i) primarily, treasury operations for profit and liquidity purposes and ii) a small portion of investment operations(around 10%). From the period 1998-2005, deposits from banks accounted for an average 65% of the Corporation's funding source,with term financing loans comprising the remainder.

In 2006, APICORP started diversifying its deposit client base with the opening of its conventional wholesale bank branch in Bahrain,operating under a Conventional Wholesale Bank License granted by the Central Bank of Bahrain (CBB). The branch is governed by theregulations of the CBB, but like other offshore banks operating in Bahrain, it does not have access to central bank liquidity facilities. Thepurpose of the branch is to complement the treasury and capital market activities of the Corporation and provide banking facilities –predominantly letter-of-credit – to clients.

At the end of 2015, deposits from private sector corporates and government-related entities (GRE) accounted for 36.9% of APICORP’sliabilities, only slightly lower than the 38% reported in 2014, while deposits from banks amounted to 4.6% of total liabilities, downfrom 5.3% in the year before. Taking a longer-term view, the share of corporate and GRE deposits has risen significantly, while theproportion of deposits from banks has shrunk.



Rating RationaleOur determination of a supranational’s rating is based on three rating factors: Capital Adequacy, Liquidity and Strength of MemberSupport. For Multilateral Development Banks, the first two factors combine to form the assessment of Intrinsic Financial Strength,which provides a preliminary rating range. The Strength of Member Support can provide uplift to the preliminary rating range. For moreinformation please see our Supranational Rating Methodology.

Capital Adequacy: HighStrong capital position and very low leverage offset moderate asset performance

Our assessment of capital adequacy measures an MDB’s capacity to absorb credit or market losses stemming from its operations, andthus preserve its ability to repay debt holders. MDBs hold capital as a buffer against potential credit losses as a consequence of theirlending and investment operations in sectors or regions that are naturally risky, in line with their mandates. In addition, most MDBs(including APICORP) do not have access to central bank liquidity facilities, given their supranational status. Hence, MDBs typically havesignificantly higher levels of capital adequacy than similarly rated commercial banks.

High levels of usable equity and relatively low leverage support capital adequacy

APICORP calculates its capital adequacy ratio (Tier 1 + Tier 2 Capital/Total Risk-Weighted Exposure) at 28.7% at year-end 2015,down slightly from 28.8% at year-end 2014. This ratio exceeds the Basel II and Central Bank of Bahrain guidelines of 8% and 12%,respectively. According to APICORP’s minimum capital adequacy guideline, the ratio should not fall below 15%.

The capital adequacy ratio we use in our analysis of MDBs is the asset coverage ratio (ACR), which is the ratio of usable equity3 to thesum of loans, equity operations, and risk-weighted treasury assets. As of 2015, APICORP is in line with its peer group4 median, withan asset coverage ratio of 52%. Since 2009, APICORP’s ACR has trended upwards, which is the result of large capital increases thathave outpaced the expansion of APICORP’s loan operations over time (see Exhibit 3). At the same time, its leverage ratio is close tothe peer group median, as debt-to-usable equity stood at 105% in 2015 (see Exhibit 4), a bit lower than its average since 2009 (112%).Nevertheless, as is our common practice for other deposit-taking MDBs, this ratio excludes deposits, which constitute a large source offunding for APICORP (44% of total liabilities in 2015). If we were to include deposits, APICORP’s leverage ratio would reach 192% atthe end of 2015, still lower than the (unadjusted) leverage ratio for CAF and CABEI.



Exhibit 3

ACR has improved significantly since 2009Exhibit 4

ACR is in line with peers, leverage is lowerYear-end 2015

Source: Moody's Investors Service * Data for CDB as of end-2014.Source: Moody's Investors Service

APICORP’s capital position is also supported by the strong quality of its asset portfolio, reflected in comparatively high and stableweighted average credit ratings for different asset classes. Based on the Corporation’s internal calculations, the weighted averagecredit rating of its total asset portfolio is estimated to be Aa. This breaks down into Corporate Finance Gross Loans showing a weightedaverage rating of Aa, Direct Equity Investments averaging A, and treasury assets5 averaging A as well.6

In addition, around 25% of APICORP’s gross loans are guaranteed. As of end-2015, almost 74% of the guarantees are provided bygovernment-related entities, while 13% are provided by private sector third-party entities – in many cases parent companies, and13% by governments. Compared to 2014, the combined share of guarantees from governments and government related entities hasincreased to 87% of all guarantees from 72%.

Asset performance is moderate

Our assessment of moderate asset performance balances the relatively high quality of APICORP’s asset portfolio with non-performingloan (NPL) levels which are higher than for its peers. At year-end 2015, gross NPLs represented 2.4% of gross corporate finance loans,for which collateral and provisioning exists. This ratio is equal to the 2014 value and down7 from 3.3% in 2011 due to no loans enteringnon-performing status during 2012 to 2014, and the restructuring of a Libyan-based loan during 2012. One new entry for $11.8 millionoccurred in 2015, which was more than offset by a $16.5 million write-off. Current NPLs include loans granted to the Iraqi Ministry ofOil and a Libyan asset. Exhibit 5 shows a comparison of APICORP’s problem loans with its peers. While APICORP’s point-in-time andseven-year average NPL ratio is higher than for its peer group, it is worth mentioning that the seven-year average NPL ratio has beencontinuously declining, reaching 2.6% in 2015, down from 3.0% in 2013.



Exhibit 5

APICORP has higher NPL ratios than its peers(NPL, % of gross loans)

Note:CDB is for 2014 and average of 2008-14.Sources: Respective financial statements, Moody's Investors Service

In 2015, the amount of gross NPLs was reduced by $4.8 million to $63.6 million as APICORP wrote off a $16.5 million NPL from theGovernment of Sudan and had a new entry of $11.8 million from a Libyan exposure. APICORP is currently in the process of writing-offits NPL from Iraq’s Ministry of Oil ($51.8 million), which the Corporation expects to be completed before the end of the year. Assumingno new NPL entries and based on the 2016 budget target of total loans of $2.7 billion, this would reduce the NPL ratio to 0.4% of totalcorporate finance loans, more in line with the peer group.

In terms of peer comparison, despite having an asset base generally regarded as less creditworthy than that of APICORP, CAF has astrong track-record of maintaining low levels of NPLs. CABEI makes loans and guarantees primarily to governments and governmentalentities with a sovereign guarantee. The CDB lends to the public sector and therefore preferred creditor status can have significantpositive impact on asset performance. The IIC, on the other hand, lends only to the private sector and therefore receives very limitedbenefit from preferred creditor status, which is also reflected in the rise in its NPL ratio in 2014.

APICORP’s relatively weaker asset performance in its corporate finance loan book reflects, in part, the challenging geopoliticalenvironment in which it operates. However, while APICORP’s relative position is weak, the absolute size of NPLs remains fairly smalland stable, and is fully provisioned (see Exhibit 6), mitigating any corresponding credit concern. Specific provisions were increased in2014, in order to cover geopolitical uncertainties in Iraq and Libya.



Exhibit 6

APICORP’s NPLs are more than fully provisioned(US$ million, as of end-2015)

Sources: APICORP, Moody's Investors Service

APICORP’s de facto preferred creditor status on its public-sector backed lending helps to keep NPLs at a moderate and manageablelevel, although it does not eliminate credit losses. Given that 75% of loans as of end-2015 are to governments or government-relatedentities – up from 68% in 2013 – preferred creditor status has the potential to boost the performance of a significant portion of itsexposures. However, preferred creditor status is not incorporated into any loan documentation, which is common practice amongMDBs. Indeed, the current stock of NPLs in Sudan and Iraq are loans to government-related entities.

According to Articles 6 & 12 of the Establishing Agreement, the Corporation must “preserve and protect APICORP’s assets, rights andprivileges of nationality, as well as its interests [held] internationally by its members.” Article 15 grants APICORP preferential access toforeign exchange in the event of a country’s foreign-exchange crisis.

Consistent with these preferences, APICORP’s loans are exempt from country risk provisioning when applicable, and its loans havenever been included in general country debt rescheduling. APICORP has only once been involved in a Paris Club rescheduling8 (Algeriain 1995) and it subsequently recovered 100% of its outstanding loan balance. Similarly, APICORP has never been subject to mandatorynew money obligations under any country debt rescheduling. Examples of this include Paris Club rescheduling and debt-forgivenessof Iraqi sovereign obligations in 2003: APICORP’s outstanding loans to government-related entities were not included in any of itsprovisions.

Concentration of assets indicates potential for sizeable impact on capital adequacy

Given its mandate to finance energy-related projects in OAPEC member states, APICORP’s asset portfolio is inevitably concentrated inthe energy sector and in the Middle East region. This concentration is not atypical for regional MDBs. APICORP’s concentration basedon the top five country exposures is high, but not inconsistent with its peers, with the exception of the IIC which has a larger regionalscope than the others. However, APICORP’s assets are concentrated even within the country and sectorial buckets, with a particularlyhigh geographic concentration in Saudi Arabia and Qatar (66% of loans) – with an additional 20% in UAE, Oman and Kuwait – and inhydrocarbon-related9 projects (over 70% of loans).

We also note that APICORP’s portfolio of treasury investments at end-2015 had significant exposure to members, either directlythrough government bonds or indirectly through state-owned entities, with more than 85% of fixed income investments in GCCcountries. While these instruments tend to be highly rated, investing treasury assets in members further compounds the geographicconcentration of assets.

Track record of profitability directly supports capital adequacy

Despite having a development mandate, APICORP, unlike many other MDBs, operates on a commercial basis, and, at times, paysdividends to shareholders. We typically assess the profitability of an MDB in terms of the contribution that it makes to building or



depleting the institution’s capital base. This analysis is particularly relevant in the case of APICORP, where the board decided to forgodividend distributions in six out of the past nine years to strengthen the Corporation’s balance sheet. However, in the April GeneralAssembly Meeting a dividend payout of $44 million was approved.

APICORP has a strong track record of profitability that has bolstered the capital base over time. However, net income in 2014 at$105.0 million was lower than in 2013, ending four successive years of record profits. Net income has grown again in 2015, reaching$107.6 million, still below the $112.1 million in 2013. Total income10 rose by 3.7% in 2015, to $162.0 million, as other income increasedstrongly to $21.7 million from $18.2 million in 2014, counterbalancing reductions in fee and dividend income and realized gains onportfolio sales. Following a sharp rise in 2013, general administrative expenses declined slightly for a second straight year to $37.7million in 2015 from $37.8 million the year before. For the first five months of 2016, net income was $43.3 million, ahead of thebudgeted $36 million, and about 45% of the full year target of $95.6 million.

Return on assets for 2015 was 1.9%, up from 1.8% in 2014 and on par with the average since 2007. Return on equity has been verystrong, with an average of 6.9% since 2007 and year-end 2015 results of 5.7%. APICORP has a proven track record of positive resultsthat are contributing to the build-up of capital.

Operating environment faces challenges, but no material impact on asset quality, capital adequacy

In the recent past, APICORP has faced new challenges in its operating environment given political unrest in a number of membercountries and the subsequent deterioration in their respective sovereign risk profiles. However, the Corporation does not have any loanexposure to Syria (unrated), while its loan portfolio in Libya (unrated), Iraq (unrated) and Egypt (B3 stable) represents an aggregate6.9% of total country exposure. For its investments in these countries, APICORP has fully provisioned for expected losses whereapplicable, preempting a significant deterioration on the Corporation’s financial performance.

Nevertheless, geopolitical risks—notably related to armed conflict—have become more prominent, and currently act as a constraint onour assessment of capital adequacy and the overall rating.

Developments in global energy markets, which have been characterized by lower global benchmark oil prices, pose a potentialthreat to APICORP’s credit profile given the sectoral concentration of its assets in petroleum-related projects. Low energy prices willpredominantly affect dividend payments from direct equity investments, which accounted for 56% of gross income11 in 2015. APICORPhas taken into consideration these developments by lowering the budgeted direct equity income share in its 2016 budget. Accordingto the Corporation, an environment of prolonged low oil prices will clearly be detrimental to prospects of investee companies. As such,the ongoing diversification of the investment portfolio is a positive.

From a lending perspective, lower oil and gas prices could potentially affect the debt service capacity of projects, but APICORPmaintains that current oil prices are still above the historically calculated project-specific breakeven prices. The Corporation seespotential positive impact from low oil prices on trade financing for net oil importers, and advisory and financing opportunities relatedto debt restructuring and refinancing.

Sustained low oil prices could put pressure on funding and liquidity conditions in the region where APICORP is operating in, particularlyfor oil exporters.



Liquidity: HighMaturity mismatch improving, but funding still reliant on deposits

Use of short-term wholesale deposit funding leads to balance sheet maturity mismatch…

The degree to which APICORP’s funding is reliant on wholesale deposits is unusual for an MDB. APICORP uses short-term wholesaledeposits to fund its sizeable treasury operations for the purposes of profit generation and liquidity. In addition, it uses them as asource of funding for a portion of its loan operations. At end-2015, 41.5% of its total liabilities were short-term deposits from banks,corporates and member states. While this share is lower than the 47.7% reported last year and even lower than the 51.7% reported in2013, within the small group of deposit-taking MDBs, APICORP remains amongst the most reliant on short-term funding.

By contrast, 73.7% of APICORP’s assets were long term (remaining maturity over one year), with 44.9% of assets having a remainingmaturity of five years or more, up from 70.5% and 34.6%, respectively in 2014. This balance sheet maturity mismatch is a creditchallenge for the Corporation and constrains its rating. Balance sheet maturity mismatches of this magnitude are uncommon in theMDB sector. We capture this credit challenge in the scorecard with a -2 adjustment in APICORP’s liquidity position

Exhibit 7

APICORP is among a small group of MDBs that take deposits

Sources: Respective financial statements, Moody's Investors Service

We view wholesale deposits to be a source of funding that is vulnerable to market confidence, owing to their greater concentration andcorrelation to economic cycles relative to retail deposits. Moreover, because MDBs tend to engage in medium- to long-term lendingactivity, relying on deposit funding can lead to a balance sheet maturity mismatch.

Whereas we acknowledge that APICORP’s deposits exhibit some stability based on the Corporation’s own definition of threeconsecutive months of renewal, APICORP’s overall funding profile compares negatively to its peers.

…which is only partly mitigated by stability of deposits and term financing program

There are some mitigating factors to this mismatch: deposits from corporates and government-related entities (which accounted for83.2% of the deposit base in 2015) are relatively stable because they are mainly deposited by companies owned by member statesthrough their state-owned oil companies or other entities with ties to one or more member states. In addition, a significant portionof these companies also have a loan or direct equity investment client relationship with APICORP, which presumably makes themsomewhat more stable than typical wholesale deposits, based on existing loan or equity relationships in place or a history of regularrenewal. Deposits from corporates have increased since the opening of the Bahrain branch in 2006, when they comprised only 18% oftotal deposits.



Another mitigating factor is that deposits from members, which amounted to $107.5 million and accounted for 6.5% of the depositbase at year-end 2015, are considered stable and have been stable over the past three years. Indeed, despite significant transition andstress starting in 2011, Libya and Syria have not withdrawn their deposits.

These deposits represent the drawn portion of the $1.0 billion line of credit which the shareholders extended to APICORP in 2008 tooffset the effects of the global financial crisis, one of which was a limited withdrawal of bank deposits (in 2009, financial institutionswithdrew $460 million, followed by a more moderate $160 million withdrawal in 2010). The remaining $892.5 million of theshareholder’s line of credit is significantly larger than the amount of wholesale bank deposits, which has further fallen in 2015 to $172million from $214.9 million and $440.6 million in 2014 and 2013, respectively. APICORP views this line of credit as a measure of lastresort and does not intend to activate it as a regular liquidity practice. In fact, the most recent increase in subscribed capital whichadded another $500 million to callable capital will replace this emergency credit line.

Over the past couple of years, efforts have focused on lengthening the average maturity of debt to mitigate the mismatches resultingfrom the short-term nature of deposits. As of end-2014, long-term funding – equity, term financing, bonds and shareholder deposits– made up 71.9% of the Corporation’s “net” stable funding requirements (for corporate finance loans and equity investments), downfrom 92% in 2013.12 Achieving a higher ratio in 2013 was helped by the 2012 closing of three Islamic term financings with maturities ofthree to five years.

In addition to contributing to a maturity lengthening, the three facilities also helped diversify APICORP’s creditor base, facilitatingaccess to Islamic pools of liquidity. Although it did not issue long-term debt in 2013, APICORP transacted its first term repo of US$173 million with a 15- month maturity. In March 2014, it also engaged in a SAR1 billion ($267 million) five-year bilateral long termfinancing. This was followed by another SAR3 billion five-year Islamic Club Term Facility in December, which included refinancingand additional borrowing. Also, in December 2014, APICORP raised $150 million through a three-year Islamic Club Term Facility. InJune 2015, APICORP established a $3 billion medium-term sukuk program (rated (P)Aa3), with the aim of further lengthening its debtmaturity, which was tapped for the first time in October 2015 with a $500 million five-year sukuk issuance. For 2016 year-to-date,APICORP has secured about $420 million in medium-term funding.

Liquidity management consistent with business model, different from most MDBs

APICORP manages liquidity by grouping maturing assets and liabilities into five time buckets: up to one month, one month to threemonths, three months to one year, one to five years, and over five years. The associated cash inflows and outflows are matched(Exhibit 8) and the cumulative gap between the cash flows as a percentage of liabilities is the relevant ratio that is managed byAPICORP. As a result of the Corporation’s willingness to reduce the short-term maturity mismatch, the cash flow gap up to one yearwas down to 34.4% as of end-2013 from 45.9% the year before. However, as of end-2014, the cumulative mismatch had increasedagain, to 46.6%, before declining to 25.8% as of the end-2015. This means that about one-fifth of APICORP’s total liabilities arematuring within one year and do not have corresponding short duration assets. Adjusting this calculation to account for stablecorporate and shareholder deposits improves the mismatch, albeit not significantly. APICORP has set thresholds for the ratio in most ofthe time buckets13 and at end-2015 was within the applicable thresholds for all of the buckets.

Exhibit 8

Maturity Profile of Assets and Liabilities as of 31 December 2015

Sources: APICORP, Moody's Investors Service

Most MDBs do not have a maturity mismatch, and manage liquidity primarily through a policy dictating the holding of a minimumlevel of liquid assets, such that a certain number of forthcoming months’ net cash outflow demands are covered. While APICORPmanagement does have such a policy, the methodology used for the calculations differs from other MDBs and as a result it is notmeaningful to make comparisons with its peers.



As shown in Exhibit 9, APICORP’s liquidity position is the weakest in its direct peer group when its deposits are incorporated intothe analysis. The exhibit illustrates that in the extremely unlikely event that APICORP loses market access for refinancing—and issimultaneously challenged by a run on deposits—APICORP could face challenges fulfilling its debt service requirements over thecourse of a full year, although it is important to note that for 2015 there were no short-term and currently maturing long-term debtrepayments due. The budget for 2016 includes $175 million in short-term borrowings, and about $400 million in CMLTD payments aredue in 2017, according to APICORP. But based on the information available, the 2016 ratio would be around 8.5%, in line with higherrated peers.

Exhibit 9

If deposits are included APICORP has the weakest debt service coverage ratio in its peer group(Short-term debt + currently maturing long-term debt) / discounted liquid assets (end-2015)

Sources: Respective financial statements, Moody's Investors Service

APICORP’s portfolio of treasury investments are entirely funded by short-term deposits. We do not consider the quality of theseinvestments to offset the risks to liquidity from the wholesale and short-term nature of the funding. APICORP currently has noinvestments in G-714 government paper, which remain highly liquid even during times of financial market turmoil. As such, while theCorporation’s treasury investments tend to be highly rated, they are not necessarily as liquid as G-7 sovereign debt, and thus do notcompletely compensate for the less stable nature of the funding.



Strength of Member Support: HighVery strong shareholder base, reinforced by incremental capitalization from retained earnings

Renewed capital increase underlines shareholder support

In May 2011, APICORP’s shareholders agreed to change the capital structure by introducing callable capital in the amount of $750million. Callable capital is an unconditional and full-faith obligation of each member country to provide additional capital when called.Along with sustained strong financial performance, this led to the upgrade of APICORP’s rating to Aa3 from A1 in September 2012.15

The introduction of callable capital demonstrates stronger support than the line of credit made available by shareholders in 2008.

Due to a scheduled increase in issued & paid up capital from general reserves, nominal callable capital reduced to $500 million from$750 million in 2015. As a result, the callable capital coverage of the Corporation’s debt stock has declined as well, putting contractualsupport at ‘low’ in our methodological scorecard, with debt representing 6.7 times the amount of discounted callable capital, lowerthan CAF, but slightly higher than CABEI.

However, during its most recent meeting in April, the General Assembly approved another capital increase which brings subscribedcapital to $2 billion from $1.5 billion and thereby increases callable capital to $1 billion from $500 million before. This will replacea $1 billion line of credit shareholders pledged in 2008 and which takes the form of deposits. At end-2015, $107.5 million had beendeposited.

Likelihood of extraordinary support demonstrated by high shareholder ratings, capital increase

The weighted median rating of APICORP’s shareholders was approximately Aa3 as of end-2015, reflecting a strong ability to provideextraordinary support. In comparison, the corresponding indicators for peers were much lower, with CABEI at Ba1, CAF at Baa2, CDB atBaa2, and the IIC at Baa2.

Of APICORP’s 10 member countries, six are rated by Moody’s (United Arab Emirates – Aa2 negative, Kuwait – Aa2 negative, Qatar –Aa2 negative, Saudi Arabia – A1 stable, Bahrain – Ba2 negative, Egypt – B3 stable).16 The capital base is held primarily by investment-grade countries (64%) – although none are Aaa-rated – with the remainder held by speculative-grade (3%) or non-rated countries(33%).

APICORP’s track record of receiving capital increases demonstrates a strong propensity for shareholders to provide support. At the timecallable capital was introduced in 2011, the amount of paid in capital was also increased by $200 million, all of which was funded bythe capitalization of dividends and reallocation from reserves. Similarly, the previous capital increase exercises in 1981, 1996, and 2003were funded by reallocation from reserves and capitalization of dividends rather than by new funds from shareholders.

In line with the decision to again forego dividend distributions for 2015, APICORP’s shareholders further demonstrated their support forthe Corporation by allowing for the use of reserves to gradually fulfill each shareholder’s capital subscription. As such, in the absence offurther capital increases, APICORP’s capital structure will gradually shift as paid in capital increases, while callable capital decreases.

Moreover, the strategic importance of the energy sector to the OAPEC economies backs our view that APICORP benefits from a highpriority of support.



Very liberal terms in relation to callable capital

APICORP’s shareholders have explicitly committed to support the institution on a “joint and several” basis. Article 6 of the Articles ofAgreement states: “The Member States undertake, jointly and severally, to support the Corporation, protect it and embrace its causesin every way that ensures the protection of its rights and interests internationally and otherwise and undertake to facilitate all theactivities related to its objectives and to adopt all possible measures to that end.”

Although we do not regard the wording of this pledge as a full financial guarantee for creditors, it does indicate a stronger willingnessto support as compared to the pro rata wording of support pledges of other MDBs. Typically, each member’s fulfillment of the callablecapital obligation is independent of the action of the other shareholders.

While it is rare for an MDB to have shareholder support in this more collective form, the language in the Articles of Agreement isopen to interpretation and is not explicitly linked to callable capital. Hence, we monitor the capital adequacy ratios amended forconsideration of joint and several callable capital (i.e., including all callable capital because the highest-rated shareholder is rated Aa2).At the same time, the key ratio we use in our analysis of contractual support—the callable capital coverage ratio—continues to includeonly the callable capital provided by those members rated Baa3 or higher.

Another unique feature of APICORP’s callable capital is that the conditions under which APICORP can request callable capital is notrestricted to debt service. Management can request callable capital in order to service debt, to expand development operations (whilemaintaining capital adequacy ratios), or to absorb losses from treasury or development-related assets. These very liberal callable capitalguidelines differ from other MDBs, which can only request callable capital to service debt. Once requested, APICORP’s callable capital isexpected to be paid in by members within two months.



Rating RangeCombining the scores for individual factors provides an indicative rating range. While the information used to determine the grid mapping is mainly historical, our ratings incorporateexpectations around future metrics and risk developments that may differ from the ones implied by the rating range. 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 indicativerating range. For more information please see our Supranational Rating Methodology.

Supranational Rating Metrics: Arab Petroleum Investments Corporation

Source: Moody's Investors Service

https://www.moodys.com/research/Multilateral-Development-Banks-and-Other-Supranational-Entities--PBC_161372



ComparativesThis section compares credit relevant information regarding APICORP with other supranationals rated by Moody’s Investors Service. Itfocuses on a comparison with supranationals within the same rating range and shows selected credit metrics and factor scores.

APICORP benefits from a solid capital position and relatively low leverage, placing the Corporation’s capital adequacy in the samecategory as CAF and higher than CABEI, although CDB and IIC have stronger equity and asset quality. APICORP’s liquidity positionis hampered by a relatively large level of short-term debt due to its reliance on deposits, which is partially offset by a lower cost offunding than CDB or CAF. Finally, shareholder support is a key credit strength that places APICORP in a favorable position relative topeers, with a very high median shareholder rating of Aa3 and the existence of callable capital.

Exhibit 12

Arab Petroleum Investments Corporation's Key Peers

Notes:[1] Usable equity is total shareholder's equity and excludes callable capital[2] Non performing loans[3] Short-term debt and currently maturing long-term debt[4] Callable capital pledge by members rated Baa3 or higher, discounted by Moody's 30-year expected loss rates associated with ratingsSources: Moody's Investors Service, respective MDB financial statements



Rating History

Exhibit 13

Arab Petroleum Investments Corporation



Annual Statistics

Exhibit 14


Exhibit 15




Exhibit 16




Moody’s Related Research

» Rating Action: Moody's affirms APICORP at Aa3; maintains stable outlook, 23 September 2016

» Credit Opinion: Arab Petroleum Investments Corporation – Aa3 Stable: Update Following Affirmation of the Rating and Outlook,23 September 2016

» Sector-in-Depth: Global Funding From Multilateral Development Banks Will Continue To Increase, September 2015 (1008025)

» Rating Methodology: Multilateral Development Banks and Other Supranational Entities, December 2013 (161372)

» Rating Methodology: Sovereign Bond Ratings, December 2015 (186644)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

Related Websites and Information Sources

» APICORP

MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for yourconvenience in locating related information and services. The websites reached through these Links or References have not necessarilybeen reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control. Accordingly, MOODY’Sexpressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or servicesprovided by or advertised on any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply anendorsement of any third party, any website, or the products or services provided by any third party.

AuthorsSteffen DyckVice President - Senior Credit Officer

Joshua GrundlegerAssociate Analyst

https://www.moodys.com/research/Moodys-affirms-APICORP-at-Aa3-maintains-stable-outlook--PR_354063

https://www.moodys.com/research/Arab-Petroleum-Investments-Corporation-Aa3-Stable-Update-Following-Affirmation-of-Credit-Opinion--PBC_1042840

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1008025


https://www.moodys.com/research/Sovereign-Bond-Ratings--PBC_186644

http://www.apic.com/



Endnotes1 The principal objective of the OAPEC Agreement is the development of regional cooperation in the petroleum industry. In pursuit of this objective, OAPEC

sponsored the creation of four companies: APICORP, the Arab Maritime Petroleum Transport Company, the Arab Shipbuilding and Repair Yard Company,and the Arab Petroleum Services Company.

2 See APICORP Diversifies its Investment Activities, a Credit Positive, February 2013.

3 Paid-in capital + reserves + retained earnings.

4 Caribbean Development Bank (CDB, Aa1); Corporacion Andina de Fomento (CAF, Aa3); Inter-American Investment Corporation (IIC, Aa1) and CentralAmerican Bank for Economic Integration (CABEI, A1).

5 Loans account for 57% of APICORP’s assets, direct equity 20%, and treasury 23%.

6 Treasury investment policy does not allow for investments in securities rated below Baa3. Current treasury exposure to member governments are to GCCcountries only.

7 The Corporation’s practice is to remove a loan from NPL status once all late payments have been paid.

8 Debt rescheduling by official/bilateral creditors.

9 Includes petrochemical, petroleum refineries, production and storage, gas processing, and other petroleum-related loans.

10 Excluding interest income of $106.7 million.

11 Excluding interest income of $106.7 million.

12 The net stable funding ratio (NSFR) is calculated by APICORP as the available amount of stable funding over the required amount of stable funding. TheNSFR should be equal to or exceed 100% and will become a minimum standard by 1 January 2018.

13 Thresholds are as follows: -30%, -40%, and -30% in the ‘up to one month’, ‘one month to three months’, ‘three months to one year’, respectively. Nothresholds are assigned for the ‘one to five years’ and ‘over five years’ buckets.

14 United States (Aaa stable), United Kingdom (Aa1 negative), France (Aa2 stable), Germany (Aaa stable), Italy (Baa2 stable), Canada (Aaa stable), and Japan(A1 stable).

15 See Moody’s upgrades APICORP to Aa3, outlook stable, 25 September 2012.

16 Ratings as of 5 October 2016.




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REPORT NUMBER 1030109

(apicorp) - aa3 stable arab petroleum investments corporation · as of 2015, apicorp’s largest...

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