The Daily Update - Abu Dhabi

S&P recently affirmed its long-term foreign currency rating for Abu Dhabi at AA with a stable outlook.  They expect that the Emirate’s large net asset position will ‘provide a considerable buffer against the impact of commodity market volatility on the economy’.  The stable outlook reflects their ‘expectation that economic growth will gradually pick up and its fiscal position will remain extremely strong over the next two years, although structural and institutional weaknesses will likely persist.’

The Abu Dhabi Government curve continues to look attractive and remains a favoured exposure for us but we also see some additional value on offer in the quasi-sovereign space. Abu Dhabi Crude Oil Pipeline (ADCOP) is an example of this: it is indirectly owned by the government of Abu Dhabi via its 100% ownership of Abu Dhabi National Oil Company (ADNOC) and ADNOC infrastructure.  ADCOP and its major counterparties are government related entities with roles in a strategically important project.  Both 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).

Abu Dhabi Government 4.125% 2047 yields close to 4.2% and trades over 4 credit notches cheap but ADCOP 4.6% 2047 sinking bond screens even more attractively on a yield of 4.5% and trades over 6 credit notches cheap on our models.

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