Today sees the end of the month and what a month it has been! Amongst the recent doom and gloom our portfolios have benefited from the risk-on bounce, with holdings in emerging market and “frontier” markets such as the Middle East enjoying the rally.
This week, we heard that Abu Dhabi is seeking to merge two of its strategically important sovereign wealth funds, the International Petroleum Investment Company (IPIC) and Mubadala Development Company. This deal swiftly follows last week's announcement of state-run bank tie-up as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.
As regular readers will know, IPIC has been a long term favourite of ours, and we are currently holders of debt issued by both IPIC and Mubadala. IPIC is the emirate’s holding company which invests in energy and related sectors globally. Mubadala is primarily an investment vehicle which supports the development of the emirate’s economy from a largely hydrocarbon-based to a diversified economy. According to those in the know, the combined assets could be worth ~USD135bn with debt at around USD 42bn. An official statement said: “Integrating the two entities would create greater benefits and enhance economic value to the government of Abu Dhabi.”
There is currently no timeline for the merger, which will be chaired by the chairman of IPIC while vice-chair will be held by Mubadala’s chief executive. We are optimistic about the tie-up, in fact the announcement has been market positive with our holdings (rated Aa2) rallying on the news; IPIC 6.87% 2041 is up two points while Mubadala 2.75% 2023 is trading at its highest level since issue, having bounced almost a point since the announcement. IPIC has typically traded slightly wider than the Mubadala curve, post-announcement, spreads across the IPIC curve have tightened. Both issues remain attractive with risk-adjusted expected returns of ~24% and 6.7% respectively, with 3 and 4 credit notch protection.
Also in cost-cutting mode is Saudi Arabia who announced this week that it is looking to conduct a feasibility study on the development of a fully integrated crude-to-chemical plant; reducing the intermediary costs of plastics. The study of the possible joint venture between state-owned Aramco and Sabic is expected to be completed by early-2017 and falls within Saudi’s “Vision 2030”. The said venture could lead to a substantial increase in the kingdom’s petrochemical production, whilst boosting exports, increasing job creation and spurring diversification within the industrial and technology sectors. Sabic officials have previously commented that the project could cost around USD30bn and will be the largest such complex to be built in one phase.
Our exposure to Saudi Arabia is via the kingdom’s dominant utility company, Saudi Electricity (SECO), rated A2/A-/A+ by the three major rating agencies. The 5.06% 2043 and 5.5% 2043 issues have enjoyed the recent post-Brexit risk-on bounce with yields tightening over 50bps and 40bps over the month, remaining attractive at 5.2% and 5.4%, respectively.