The Daily Update - Quasi sovereigns and TAQA

Fitch recently assigned Abu Dhabi National Energy Company PJSC (TAQA) a long-term issuer default rating of A (stable outlook), a first time rating. TAQA is 75% owned (indirectly) by the Government of Abu Dhabi and benefits from its ‘supportive parent links’ with a strong ‘likelihood of government support’.

TAQA’s ‘A’ rating remains 3 notches below the sovereign which Fitch rate AA, also with a stable outlook, reflecting that it is more of a holding company but the stakes in the power generation and water assets are 54% owned and it is not the operator of the majority of the assets. Nevertheless, given TAQA supplies over 90 percent of the UAE’s power and water needs through its 8 IWPPs it is strategically important. Moreover, ADWEC (the Abu Dhabi Water and Electricity Company) is the main buyer which is itself a wholly owned subsidiary of TAQA’s main shareholder ADWEA.

TAQA’s stand-alone credit profile has been on the weak side with high debt levels but it has put in place a transformation programme which has generated benefits in terms of cost-cutting and capex optimisation. It was therefore encouraging to see TAQA register a preliminary full-year net profit of AED171m for 2017 after a sizeable exceptional impairment charge in 2016 pushed it into a loss-making position. Importantly, the government has a track record of backing TAQA with a put option and then land lease transfers effectively offsetting sizeable write-offs on some international hydrocarbon projects.

Quasi-sovereigns have been a focus of ours for many years as in many cases they trade at attractive spreads over their own sovereign. Although the issues are usually not explicitly guaranteed by the government, the strategic importance of quasi-sovereigns means that the government is highly likely to stand behind these credits. TAQA 6.5% 2036 is one of our portfolio holdings, rated A3/BBB+/A by Moody’s/S&P/Fitch, and trades at a yield of 4.7% and over 3.4 credit notches cheap on a best rating basis.

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