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Fitch Rating Confirmation
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,
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
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
Fitch understands that Masdar is politically important to the government as it
Financial impact of default:
Although the Masdar brand is closely associated with the emirate
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
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
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
Derivation summary
Fitch rates Masdar’s GRE as
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
short term rating
Top-down rating as an issuer
debt rating
Non-recourse project finance loans in total Masdar portfolio
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
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
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
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
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
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 “
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