Oil adds another dollar as Iran sanctions loom

A US Navy soldier onboard Mark VI Patrol Boat stands guard as an oil tanker makes its way towards Bahrain port, during an exercise. (Reuters)
Updated 11 September 2018
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Oil adds another dollar as Iran sanctions loom

  • US sanctions to target Iran oil exports from November
  • Washington wants other producers to replace falling Iran exports

LONDON: Oil prices rose about $1 a barrel on Tuesday as US sanctions squeezed Iranian crude exports, tightening global supply despite efforts by Washington to get other producers to increase output.
Brent crude futures rose $1.13 to $78.50 a barrel while WTI crude gained $1.10 to $68.64 a barrel in mid afternoon trade in London.
“The impact of the US sanctions on Iran is firmly being felt,” said Tamas Varga, analyst at London brokerage PVM Oil. “The biggest worry is obviously the amount of Iranian oil that is disappearing from the market.”
Washington has told its allies to reduce imports of Iranian oil and several Asian buyers, including South Korea, Japan and India appear to be falling in line.
But the US government does not want to push up oil prices, which could depress economic activity or even trigger a slowdown in global growth.
US Energy Secretary Rick Perry met Saudi Energy Minister Khalid Al-Falih on Monday in Washington, as the Trump administration encourages big oil-producing countries to keep output high. Perry will meet with Russian Energy Minister Alexander Novak on Thursday in Moscow.
Russia, the US and Saudi Arabia are the world’s three biggest oil producers by far, meeting around a third of the world’s almost 100 million barrels per day (bpd) of daily crude consumption.
Their combined output has risen by 3.8 million bpd since September 2014, more than the peak output Iran has managed over the last three years.
Russian Energy Minister Alexander Novak said on Tuesday that Russia and a group of producers around the Middle East which dominate OPEC may sign a new long-term cooperation deal at the beginning of December, the TASS news agency reported. Novak did not provide details.
A group of OPEC and non-OPEC producers have been voluntarily withholding supplies since January 2017 to tighten markets, but with crude prices up by more than 40 percent since then and markets significantly tighter, there has been pressure on producers to raise output.
As Middle East markets tighten, Asian buyers are seeking alternative supplies, with South Korean and Japanese imports of US crude hitting a record in September.
US oil producers are seeking new buyers for crude they used to sell to China before orders slowed because of the trade disputes between Washington and Beijing.
This is one reason that the discount for US crude versus Brent has widened to around $10 per barrel, the biggest since June, traders said.


Abu Dhabi said to study restructuring options for $1.2bn Etihad-linked bonds

Updated 19 September 2018
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Abu Dhabi said to study restructuring options for $1.2bn Etihad-linked bonds

  • Bonds issued through SPV with other airlines
  • Etihad asks Abu Dhabi government for help

DUBAI: The government of Abu Dhabi is looking at proposals to restructure some $1.2 billion of troubled bonds that were issued by Abu Dhabi state-owned carrier Etihad Airways in partnership with other airlines, sources familiar with the matter said.
Etihad issued $700 million of bonds through a special purpose vehicle (SPV) called Equity Alliance Partners (EAP) in 2015, and $500 million in 2016. Proceeds of the paper went to Etihad and other airlines it partially owned at the time, including Alitalia and Air Berlin, which are now both insolvent.
The notes were seen as strengthening Etihad's partnerships with those airlines after it spent billions of dollars in acquisitions.
The EAP bonds have been trading at a significant discount for over a year, however, after Alitalia entered special administration and Air Berlin filed for bankruptcy.
Etihad has no legal responsibility to bail out the portion of the bonds which benefited the two European airlines as the notes have no cross-default provision.
But with over $500 million of the paper held by United Arab Emirates investors, it has asked the Abu Dhabi Department of Finance to find a way to reduce losses for investors and limit any damage to the reputation of the local debt market, sources familiar with the matter said.
The department is now working with a financial adviser to find restructuring solutions, said the sources. One option being discussed could involve adjusting the structure of the paper to obtain a better credit rating. Rating agency Fitch has been involved in some of the discussions, the sources said.
Etihad declined to comment while a spokesman for the Abu Dhabi Department of Finance did not respond to a request for comment. Fitch declined to comment.
Any type of restructuring would require bondholders’ approval.
Etihad agreed to cover Alitalia’s portion of the debt, equivalent to around $230 million, at maturity through an agreement between the airlines which was signed before Alitalia entered special administration. But Air Berlin’s portion, of roughly the same amount, has no such guarantee.
Any intervention by the Abu Dhabi government, which could materialise before the end of this year, might see Abu Dhabi inject around $200-300 million into the issuing vehicle, said the sources.
This amount would be applied towards a partial early redemption of the notes at a discount of around 15 percent to par value for note holders seeking an early exit, the sources said. That would imply a write-off of Air Berlin’s obligation under the structure, while Alitalia’s debt would be honoured.
Creditors unwilling to exit at a discount might swap their notes into new instruments with a higher credit rating. The notes could feature a credit enhancement in the form of a guarantee of the obligations of Air Serbia and Air Seychelles, which are part of the borrowing structure, the sources said.
The first tranche of the notes, due 2020, is rated CC by Fitch, while the second tranche due 2021 is rated C.
With an Abu Dhabi intervention, the notes would become investment grade because of the oil-rich emirate's strong credit profile, so any capital injection by the government could be partially offset by a reduction in interest payments.
Last month, the SPV said it received a bid of just over $4 million in cash for the debt obligations of Alitalia and Air Berlin across the two EAP bond tranches.
The bid included around $6 million that would become payable to the SPV in case of recovery of an equivalent amount from the obligations, and a payment of 60 percent of money recovered after a 35 percent recovery threshold was reached.
The bid had an expiry date of Aug. 31; the SPV asked the bidder to extend the deadline to give note holders time to review terms. Since then, the SPV has given no update on the bidding process.