OREANDA-NEWS. Fitch Ratings has affirmed Abu Dhabi-based International Petroleum Investment Company PJSC's (IPIC) Long-term local and foreign currency Issuer Default Ratings (IDR) at 'AA' and Short-term foreign currency IDR at 'F1+'. A full list of rating actions is available at the end of this commentary.

The ratings are aligned with those of IPIC's parent, the Government of the Emirate of Abu Dhabi (AA/Stable), under Fitch's parent and subsidiary linkage methodology. This reflects our view that sovereign-owned IPIC is of strategic importance to the government in its role as an investment vehicle for the state, primarily in the domestic and foreign hydrocarbon and petrochemical sectors.

KEY RATING DRIVERS

Strategic Role Underpins Linkage
The members of IPIC's Board of Directors are appointed by the government and the company owns and manages infrastructure projects and investments central to Abu Dhabi's strategy in the energy sector. Those include the 1.5m bpd Abu Dhabi Crude Oil Pipeline (ADCOP) commissioned in 2012. IPIC represents the government's interests through investments in oil and gas companies in Europe and the US. Although the group's debt does not benefit from state guarantees or cross-default clauses, tangible support has been offered in the past in the form of equity injections.

Standalone Credit Profile
IPIC's standalone credit profile maps to a rating in the 'BB' category, based on Fitch's "Rating Investment Holding Companies" criteria. This is supported by the implied average rating of the subordinated dividend income from its main investments, albeit with some concentration risk. The group fully owns CEPSA (primary source of dividends) and Nova Chemicals (BBB-/Stable), and holds stakes in Borealis (73% indirect stake), OMV (A-/Stable, 24.9%), Cosmo Oil (20.8%) and EDP Portugal (BBB-/Stable, 4.1%). Other positive factors include IPIC's stable dividend stream and its clear and successful investment policy. Constraints on the standalone rating include IPIC's weak leverage, coverage ratios and liquidity.

Contingent Liabilities
In 2015 IPIC provided USD1bn funding to 1Malaysia Development Berhad (1MDB), a state-owned fund of Malaysia (A-/Stable), and agreed to cover coupon payments on USD3.5bn debt issued by 1MDB's subsidiary. We do not rule out a scenario where IPIC would be asked to provide further support to the fund. We would, however, expect IPIC's owner to support IPIC financially in such a case.

RATING SENSITIVITIES

Sovereign Rating Change
A change to the sovereign ratings of Abu Dhabi would highly likely result in a similar change to IPIC's ratings.
For the sovereign rating of Abu Dhabi, Fitch outlined the following sensitivities in its rating action commentary of 10 July 2015:

The main factors that, individually or collectively, could lead to positive rating action are:
- Addressing deficiencies in structural indicators and strengthening policymaking institutions, relative to peers, which would ultimately be conducive to reducing the economy's dependence on oil.
- An improvement in the transparency and availability of key data.

The main factors that, individually or collectively, could lead to negative rating action are:
- A sustained period of oil prices sharply lower than Fitch's forecasts that erode fiscal and external buffers, coupled with the crystallisation of contingent liabilities.
- Spill over from a regional geopolitical shock that impacts economic, social or political stability.

Portfolio Value to Debt
Negative rating action could occur if IPIC fails to maintain total assets-to-total borrowings of more than 1.5x at the IPIC level. The ratio was around 2.6x at end-2014, up slightly from 2.4x in 2013. Fitch currently views this coverage ratio as satisfactory for the current ratings.

Relevant Investments
The ratings could change if IPIC deviates from its core energy investment mandate with or without the support or involvement of the government. A material deviation away from core investments in energy-related sectors to more than 20% of the total group portfolio value would lead Fitch to review the ratings.

LIQUIDITY AND DEBT STRUCTURE

Short-term debt at end-June 2015 included USD1.75bn bonds maturing in November 2015 and a EUR1.25bn bond maturing in May 2016. Cash and deposits at end-June 2015 totalled USD0.8bn. IPIC had also undrawn, available credit lines totalling USD1.4bn. IPIC has received around USD4bn in advance payments for the sale of the ADCOP pipeline to ADNOC and thus far, the proceeds have been used to pay down debt. IPIC expects to receive an additional USD0.8bn advance payment in 2H15.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Stable income driven by dividends from CEPSA, Nova Chemicals, Borealis and OMV
-Subsidies, equity injections and other forms of state support (ie. payments for assets) as approved by the government or expected by IPIC.

FULL LIST OF RATING ACTIONS

IPIC
-Long-term local and foreign currency IDR affirmed at 'AA'; Outlook Stable
-Short-term foreign currency IDR affirmed at 'F1+'
-Senior unsecured debt affirmed at 'AA'

IPIC GMTN Limited
-Senior unsecured debt affirmed at 'AA'