Standard & Poor’s Ratings Services affirmed its long- and short-term local and foreign currency issuer credit ratings on Abu Dhabi-based International Petroleum Investment Co. (IPIC) at ‘AA/A-1+’. The outlook is stable.
The affirmation reflects that, under our enhanced criteria for rating government-related entities (GREs), we equalize the ratings on IPIC with those on the sovereign, even though the government of Abu Dhabi does not formally guarantee IPIC’s liabilities. Under our criteria, we assess the likelihood that the government of Abu Dhabi would provide extraordinary support to IPIC in the case of financial stress as “almost certain.”
IPIC plays a critical role in public policy by implementing the government’s long-standing strategy to diversify and enhance utility and value added from the emirate’s hydrocarbon resources. Through its investments, it aims to develop the hydrocarbon and petrochemical industries, and implement strategic national projects with a view to securing demand and supply of Abu Dhabi’s oil in times of crisis. IPIC operates on behalf of the government and implements projects approved by its board of directors, which includes senior members of the government.
“We view IPIC’s link to the government of Abu Dhabi as “integral.” All members of the board of directors are appointed by the government. Three of the eight board members serve on the Supreme Petroleum Council (SPC), which formulates and implements Abu Dhabi’s petroleum policy, and is headed by the ruler of Abu Dhabi. Two members of the IPIC board are members of the executive council, including Hamad Al Hurr Al Suwaidi, Chairman of the Department of Finance and member of the SPC, who helps to ensure regular communication with, and oversight by, the emirate’s fiscal authority,” S&P in a statement said.
In March 2010, the government of Abu Dhabi took the extraordinary step of publicly stating its support for IPIC through a press release issued by the Department of Finance (DoF). The statement quoted the undersecretary of the DoF as saying that IPIC, together with Mubadala Development Co. PJSC and Tourism Development and Investment Co. PJSC, was “irreplaceable” and that, in the government’s view, “it is impossible to differentiate between the government and any of these entities in terms of credit risk” because the government supports these entities fully and unconditionally. We consider this written statement to be an exceptionally strong and explicit articulation of government support, which is unprecedented in the Gulf Cooperation Council region. The government has repeated its position to Standard & Poor’s many times since 2010, most recently in July 2013.
This support, coupled with IPIC’s functional proximity to the Abu Dhabi government, and repeated governmental capital increases, leads us to conclude that the government has the capacity, and willingness, to continue to provide substantial ongoing support to IPIC’s operations, and to intervene in a timely manner if the company were to require extraordinary financial support.
“We rate IPIC’s stand-alone credit profile (SACP) at ‘bb-‘, based on our assessment of its business risk profile as “satisfactory” and its financial risk profile as “aggressive.” IPIC’s “satisfactory” business risk profile is supported mainly by strong asset quality, diversification, and a good profitability track record, offset to some extent by the cyclical nature of the oil and gas downstream industry and an opportunistic acquisition strategy. The key weakness of the “aggressive” financial profile is relatively high consolidated financial leverage–adjusted debt to EBITDA is 9.6x and funds from operations to debt is 4.6%–and our assessment of IPIC’s “less than adequate” liquidity position before factoring in government support,” S&P added.
The stable outlook reflects our view that IPIC’s “integral” link with, and “critical” role for, the government will remain unchanged, and that the company would benefit from the government’s extraordinary financial support, should the need arise.
“We would likely lower the rating on IPIC if we were to lower the rating on the government of Abu Dhabi, or detect any weakening of the government’s commitment to IPIC. We could also re-evaluate IPIC’s “critical” role to the government if IPIC’s strategic mandate to secure the distribution and the return on Abu Dhabi’s hydrocarbon resources were diluted. In our view, this could materialize from increased diversification in the company’s investments and activities outside of the energy sector. A higher rating could result from an improvement in Abu Dhabi’s credit quality, to which the underlying credit risk of IPIC is linked.”