The Daily Update - Quasi-sovereigns and ADCORP

For us quasi-sovereigns are an attractive place to be positioned on a risk-reward basis.  Most quasi-sovereigns trade at wider spreads than their own governments giving extra compensation for what are often modest additional risks: although these issues are often not explicitly guaranteed by the government the strategic importance of the assets means that the government is likely to stand behind these assets and the issuer.

Admittedly, the spread quasi-sovereigns offer over the appropriate sovereign have contracted in a lot of markets as the search for yield continues, but it is nevertheless extra return and yield worth capturing if justified by the ratings. Using data from Barclays, the median quasi-sovereign spread has contracted from close to 90 basis points in February to around 60 basis points.

This week Abu Dhabi Crude Oil Pipeline (ADCOP) came to the market with a two tranche USD3.07bn bond issue. ADCOP is 100% owned by Abu Dhabi National Oil Company (ADNOC), via ADNOC infrastructure, and ADNOC is itself 100% owned by the Government of Abu Dhabi: S&P and Fitch rate ADCOP on a par with their AA rating for the Abu Dhabi Government.

ADCOP owns a pipeline that is responsible for transporting 23% of ADNOC’s oil output from Habshan in Abu Dhabi to Fujairah port via the 405 km pipeline it operates.  The pipeline has been operating since 2012, uses established technology and it bypasses the Strait of Hormuz which is congested and reduces transportation times. ADCOP generates its revenue through a 37 year use and operate agreement with ADNOC Onshore, the operator of the pipeline, (which is 60% owned by ADNOC).  The agreement provides for transporting a minimum of 600,000 bpd amounting to at least USD219m in payments per year to ADCOP and there is scope to transport greater volumes were the need to arise.  The contract and agreements in place mitigate a lot of risks to ADCOP which are credit supportive in terms of its ability to service its debt; for example, the use or pay contract is robust and insulate ADCOP from oil supply and price risk.

ADCOP issued a 30-year final maturity amortising bond with a yield of 4.6% which (for an AA rated bond) is trading over 6 credit notches cheap according to our models. This deal was particularly interesting as we think the long-end of the Abu Dhabi Government curve is attractive in its own right.  According to our models, Abu Dhabi Government 4.125% 2047 yields close to 4.2% and is trading over 4 credit notches cheap.

Abu Dhabi has retained its Aa2/AA/AA by Moody’s, S&P and Fitch respectively despite a lower oil price environment triggering rating downgrades in a number of GCC countries as current account and fiscal balances have come under pressure and government debt levels have started to rise. Abu Dhabi benefits from a low fiscal breakeven oil price which the IMF estimates at $67 for 2017 and $59 for 2018 (for the UAE). Abu Dhabi’s high level of fiscal strength is helped by asset buffers which help to offset a fiscal deficit which Moody’s estimate as 3.1% of GDP in 2017 down from 6.7% of GDP in 2016.  Abu Dhabi has a low government debt to GDP level of 4% in 2016, projected to rise to 7.2% in 2017 (Moody’s estimate), combined with a very strong NFA position of 282% of GDP in 2016 (Fitch).

For us, quasi-sovereign issues from creditor nations remain compelling investments.

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