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Abu Dhabi’s $10b Sovereign Bond Attracts Top Ratings

The energy-rich emirate has registered a Global Medium-Term Note, or GMTN, programme envisaging issuance of up to $10 billion in global sovereign bonds, at benchmark sizes and at medium-term maturities. The bond would raise Abu Dhabi’s debt 10-fold to 10 per cent of the forecast GDP, said Fitch, which assigned a ‘AA’ ranking to the bond, the third highest investment-grade category.

Moody’s Investor’s Service will assign a foreign currency rating of ‘Aa2’ with a stable outlook to the bond, while Standard & Poor’s said that it assigned its ‘AA’ long-term senior unsecured debt rating to the note. The emirate had issued a debut $1 billion five-year sovereign euro bond in July 2007.

The latest issuance will consolidate Abu Dhabi’s presence in the market, establish a yield curve and enhance the emirate’s financing flexibility.

“The ratings on the bond are supported by the government’s very strong asset position which provides significant financial flexibility, the country’s high level of political stability and wealth, underpinned by its rich resource endowment, and by policies that reinforce Abu Dhabi’s integration with the global economy,” Standard & Poor’s credit analyst Farouk Soussa said.

Charles Seville, Associate Director in the Sovereign group at Fitch said: “Although well-placed to weather shocks, Abu Dhabi has been hit by the steep fall in the oil price and declining investment returns.” Government revenues, dominated by oil export earnings, are likely to shrink to less than half of 2008 levels and Fitch forecasts a fiscal deficit of 10 per cent of GDP for 2009.

Government policy is to press ahead with Abu Dhabi’s development and diversification programmes to keep the economy growing. In recognition of the weaker global growth outlook, however, the government will postpone or re-phase some of its projects.

As in previous episodes of falling oil prices, the Abu Dhabi will draw significantly on the dividend from the national oil company, ADNOC, and income earned by its main sovereign wealth fund, the Abu Dhabi Investment Authority, or ADIA, to fund the budget. After an increase of 54 per cent in 2008 spending, the government is projecting a fall of 13 per cent in 2009, despite higher capital spending. But even if world oil prices average just about $40 per barrel in 2009, the government’s revenue, which includes income received by ADIA, and the ADNOC dividend, will continue to record a surplus.

Abu Dhabi’s external assets, mainly held at ADIA, are understood by Fitch to be equivalent to at least 200 per cent of the GDP. Like most other investors around the world, ADIA suffered capital losses on its investments in 2008, but it also received major capital inflows as high oil prices boosted government revenues and profits of national oil companies.

Its net external credit position is stronger than that of Saudi Arabia (‘AA-’ (‘AA’ minus)/Outlook Stable) and comparable to Kuwait (‘AA’/Outlook Stable) and has been resilient to the oil price and financial market shocks seen over the past year. Notwithstanding Abu Dhabi’s low direct debt, Fitch had earlier stressed the existence of contingent liabilities in its wider public sector.

The total external debt of public and private sectors is estimated by Fitch at up to $50 billion, or 36 per cent of 2008 GDP, at the year-end — around half of it owed by wholly or majority owned by state enterprises. Abu Dhabi pledged last month to inject $4.3 billion in capital into five principal banks based in the emirate. The measure was designed to give banks sufficient resources to absorb future losses and continue to lend.

— abdulbasit@khaleejtimes.com