Recently, Fitch affirmed its LT foreign rating for Abu Dhabi at AA with a stable outlook acknowledging its strong fiscal and external metrics. In particular Fitch notes; ‘Sovereign net foreign assets are estimated to be third-largest among Fitch-rated sovereigns, at 185% of GDP in 2018, and government debt is among the lowest, at a forecast 11% of GDP at end-2019.’
We like Abu Dhabi from an NFA, credit strengths and valuation perspective: For example, Abu Dhabi 4.125% 2047 trades ~3 credit notches cheap on our models. However, we see more value in quasi-sovereign issuers such as MDGH–GMTN (Mamoura Diversified Global Holdings formerly known as Mubadala Development Company) 6.875% 2041 which is rated Aa2/AA by Moody’s/Fitch and trades ~4.5 notches cheap. Incidentally, last week Mamoura (MDGH – GMTV BV) raised USD3.5bn in a 3 tranche 5/10/30 year debt offering: these issues are also trading over 4 credit notches cheap.
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. To illustrate the point MDGH-GMTV 3.75% 2029 trades at a spread of 108bps over USTs versus the Abu Dhabi Government 2.5% 2029 which trades at a spread of 76bps over USTs. Both bonds are rated Aa2/AA/AA by Moody’s/S&P/Fitch respectively.
MDGH, while it does not have an explicit government guarantee, plays a critical role for the government given its mandate to diversify the economy, and as a key vehicle for business development and the integration of Abu Dhabi into the world economy. MDGH is indirectly 100% owned by the government via the Mubadala Investment Company MIC. The strategic importance of the company cannot be overstated with previous comments from government officials saying of the former MDC that “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”.
For us, quasi-sovereign issues from creditor nations remain compelling investments.