Fitch affirms Abu Dhabi Future Energy Company PJSC’s rating at ‘A+’; outlook stable

Fitch Rating Confirmation Abu Dhabi Future Energy Company PJSC (Masdar) Long-term foreign and local currency Issuer Default Rating (IDR) of ‘A+’, with a stable outlook.

Ratings have been removed from Rating Watch Evolving.

The rating action follows a corporate restructuring.

Fitch rates Masdar on a top-down basis, two notches below Abu Dhabi (AA/Stable). This reflects Fitch’s view that Masdar was created to carry out the highly strategic public mission of the emirate of Abu Dhabi, which clearly has an interest in ensuring Masdar’s financial stability. This implies a Support score of 20 out of 60 under Fitch’s Government-Related Entity (GRE) rating scale.

Masdar’s Standalone Credit Profile of ‘a-‘ reflects that leverage (adjusted net debt to EBITDA) is expected to remain at 4 times or so.

Key Rating Drivers

Status, Ownership and Control:

Masdar is a commercial law firm indirectly owned by the Emirate of Abu Dhabi through an intermediate holding company, Mamoura Diversified Global Holdings (AA/Stable) Abu Dhabi National Energy Company PJSC (TAQA, AA-/stable) and Abu Dhabi National Oil Company (ADNOC). Fitch expects Abu Dhabi The government retains full indirect ownership of the company in the medium term and maintains oversight of operations through intermediary shareholders.

Fitch believes the government exercises broad control over a company’s strategy and operations, particularly where it has members of the federal cabinet on its board, with investment strategies discussed at the highest level of government. Masdar’s investments and borrowings are subject to the approval of its shareholders. Changes in ownership had a neutral impact on this assessment.

support Track record:

In Fitch’s view, Masdar has been supported since its inception in 2007 and, despite the size of its projects, has very low reliance on external debt. In the past, state support was mainly used for the development of Masdar City, in the form of an initial in-kind contribution of land, regular direct grants from the government, and equity infusions. With a reduced focus on renewable and clean energy investments and the government’s commitment to reach 100GW of Masdar’s production capacity by 2030, significant equity injections are expected in the future. This is to limit the holding company’s leverage and maintain a strong underlying financial position.

Fitch sees no legal or policy constraints on the government providing timely support to Masdar when needed.

Socio-political implications of default:

Fitch believes a default by Masdar on its financial obligations is unlikely to jeopardize the delivery of essential public services or have a strong economic impact on Masdar Abu Dhabi. Masdar is moderately sized compared to other GREs Abu Dhabi and rely minimally on foreign debt to finance its operations. Currently, most operations are financed at the project level and are non-recourse, so a default on this debt would not constitute a default by Masdar.Fitch understands that Masdar’s inability to continue operations may result in short-term service disruption, but in the medium term alternatives exist in Abu Dhabi Other GREs.

Fitch understands that Masdar is politically important to the government as it Abu Dhabi Economic Vision 2030, developed in 2009, aims to lead the country’s energy transition, and due to its Abu Dhabi GRE.It is also key to future policy mandates through Masdar and other countries making international commitments on future renewable energy projects and is indispensable Abu Dhabi Achieve net zero goal by 2050.

Financial impact of default:

Although the Masdar brand is closely associated with the emirate Abu Dhabi According to market participants, Fitch does not view Masdar as a proxy financing vehicle Abu Dhabi Because it does not create debt to fund core government duties.

Fitch believes a Masdar default could have a modest impact on the availability and cost of financing for the government and other GREs that rely on government support due to Masdar’s shareholders and their close ties to the government.

Masdar has not been singled out by the government like some larger cities because it is more likely to receive special support Abu Dhabi GREs like Mamoura are a thing of the past.

Independent Credit Profile

Fitch rates Masdar’s SCP at ‘a-‘, reflecting a combination of expected leverage to remain below 4x in our rating scenario and a ‘Moderate’ assessment of qualitative risk factors for revenue defensiveness and operational risk .

Gap-specific ‘a-‘ SCPs originate from leverage ratios at the higher end of the ‘a’ category range, according to the GRE Gap Guidelines table (‘a’ category corresponds to leverage between 0x and 4x).

income defense

After the merger, Masdar’s revenue structure has changed. Previously, Masdar’s revenues were primarily derived from two sources – rental-related income from Masdar City management and finance income from its investments in clean energy projects – which benefited from strong growth linked to increased investment in the global energy transition Outlook. However, Fitch believes it still faces inherent volatility in energy markets and growing competition among Gulf states to attract foreign investment.

After the entity is restructured, it will no longer receive rent from Masdar City. But the transfer of several U.S. assets from Mubadala during the restructuring will add to investment returns. Masdar is also expected to expand significantly, backed by the government through equity injections, thereby substantially increasing the level of investment income Masdar generates.

Masdar’s financial gains from investments in clean energy projects should benefit from a surge in global investment in the sector amid growing awareness of climate change. A substantial portion of the dividend income received by Masdar comes from Dajin Offshore Wind Power Co., Ltd. Project (Issue Rating: A-/Stable) U.K.: Fitch’s Positive Issues Rating of “A-” on the project does not represent a constraint on the Masdar SCP.

Masdar’s revenue is secured in part by long-term contracts, which provide some predictability.

business risk

Fitch views operational risk as a ‘mid-range’ factor in its assessment of Masdar SCP. It is associated with a combination of “moderate” operating costs, with moderate fluctuations in expenses and major capital expenditure plans, and “moderate” resource management.

Fitch believes that Masdar’s operating cost drivers are well-defined and the underlying volatility is moderate. Staff costs are still the main cost item, with an average increase of 5%, which is lower than the revenue growth. Masdar has a significant capex program tied to its investment program in clean energy projects, but it also has some flexibility to scale back if the macroeconomic environment remains uncertain.

financial overview

There have been major changes to Masdar’s underlying cash flow and how it operates.We expect continued high demand for renewable energy products at home and abroad, with oil and gas supplies disrupted by the US-China conflict Ukraine. We expect Masdar’s financial profile to remain strong, with substantial cash inflows from equity injections and limited leverage at the holding company. Most costs and revenue streams will be calculated on an equity, project-by-project basis, with dividends going to the parent company. In Fitch’s rating case, some holding company-grade debt is expected to be issued, raising net debt/EBITDA to around 3.5x, but still within the Strong rating and ‘a’ category.

Derivation summary

Fitch rates Masdar’s GRE as Abu Dhabialthough it is indirectly owned by the emirate and viewed through three intermediary holdings (Mamoura, TAQA and ADNOC).

The combination of a GRE score of 20 and an SCP of “a-” (ie four grades away from Sovereign) results in a negative 2 on the top-down rating methodology, resulting in a long-term IDR of “A+”.

Since the indirect owner still exists, no standard changes are required for this assessment Abu DhabiFitch believes that control has not been diluted and Masdar is still fulfilling its public policy mandate.

short term rating

Top-down rating as an issuer Abu Dhabi Masdar has a short-term issuer default rating of “F1+”.

debt rating

Non-recourse project finance loans in total Masdar portfolio $5.6 billion Total, of which Masdar’s net share is $2.3 billion.

key assumptions

Masdar has seen major changes this year, revising policy goals and changing its ownership structure. As a result, we expect a significant shift in the way it operates and projected revenue and cost growth. The focus will be on clean energy investments primarily done by project, with non-recourse debt and higher levels of ownership.Due to further equity investment by shareholders and United Arab Emirates state.

Due to this change, we use the business plan provided by the entity as our base case scenario. We have stressed this base case scenario to arrive at our rating case.

Liquidity and Debt Structure

Masdar’s liquidity is mainly secured by a high level of unrestricted cash of AED 400 million by the end of 2021.

Issuer profile

Masdar is GRE Abu Dhabi Focus on investments in clean or renewable energy.

rating sensitivity

Factors that could individually or collectively lead to negative rating action/downgrade:

Masdar’s IDR is sensitive to both its sponsor’s IDR and SCP due to the GRE standard placement guide table.

Masdar’s issuer default rating downgrade likely due to Abu Dhabi In our rating case scenario, Masdar’s leverage continues to decline two notches to ‘A+’, or deteriorates from a sustained level to over 4x.

A revision of Fitch’s assessment of state support could also result in a rating downgrade.

Factors that could individually or collectively lead to positive rating action/upgrade:

Masdar’s IDR upgrade may be due to Abu Dhabi IDR down two notches to ‘AAA level‘ or Masdar’s leverage continues to improve below 2x in our rating case scenario.

A revision to Fitch’s assessment of state support could also lead to a rating upgrade.

ESG considerations

Unless otherwise disclosed in this section, the maximum score for ESG credit relevance is ‘3’. This means that ESG issues are credit neutral, or have little credit impact on an entity due to their nature or the way an entity manages them. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg

Public ratings with credit links to other ratings

Ratings linked to credit Abu Dhabi.

Best/Worst Case Rating Scenarios

Optimal rating upgrade scenarios (defined as the 99th percentile of rating transitions, measured in positive terms) for the international credit ratings of sovereign, public finance, and infrastructure issuers within three notches of the three-year rating horizon; and Three levels of worst-case downgrade scenarios (defined as the 99th percentile of rating shifts, measured in negative terms). Full range of best and worst case credit ratings for all rating categories from “AAA level‘ to ‘D’. Best and worst-case credit ratings are based on historical performance.For more information on the methodology used to determine best and worst-case credit ratings for specific industries, visit https://www.fitchratings.com/site/re/10111579.