Quasi-sovereigns continue to be an interesting area of our investment universe: in many cases these bonds screen attractively on our valuation models and although the issues are usually not explicitly guaranteed by the government, a combination of government ownership and the strategic importance of quasi-sovereigns means that the government is highly likely to stand behind these credits.
TAQA and ADPower, quasi-sovereign power sector issuers in Abu Dhabi, have sparked some interest of late: ADPower (Abu Dhabi Power Corporation PJSC), the government owned owner of water and electricity assets in Abu Dhabi has made an offer to TAQA (Abu Dhabi National Energy Company PJSC), a holding company for energy and water assets in Abu Dhabi and other international assets. AD Power, which already owns 74.1% of TAQA, has offered to inject assets into TAQA in exchange for a convertible instrument and the termination of a land lease agreement between the two. Upon conversion ADPower’s stake in TAQA would rise to 98.6%. The transaction could close in the 2H’2020 if TAQA’s board and shareholders approve the deal.
We see this potential transaction as positive as it would further entrench TAQA’s quasi-sovereign status as it becomes the main vehicle for Abu Dhabi’s water and electricity assets which is likely to be reflected in ratings upgrades. This week, Fitch which rate the LT senior unsecured debt ‘A’ have put TAQA on ‘Rating Watch Positive’ (RWP). They note: “The RWP reflects Fitch's belief that TAQA's rating could benefit from increased indirect government shareholding, and strengthening of the links under Fitch's Government-Related Entities Rating (GRE) criteria between TAQA and Abu Dhabi (AA/Stable). The RWP also reflects the transfer of regulated transmission and distribution assets, resulting in a possible improvement in TAQA's Standalone Credit Profile. However, we have yet to understand and assess TAQA's financial policy after the transaction and expect to resolve the RWP once it closes, which may be in 2H20.” Moody’s have also placed all the TAQA ratings ‘under review for upgrade’ including the A3 long-term issuer rating.
That said, in terms of liquidity and valuation upside we see greater opportunity in the quasi sovereign MDGH-GMTN (Mamoura Diversified Global Holdings formerly known as Mubadala Development Company). 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”. MDGH-GMTN 6.875% 2041 which is rated Aa2/AA by Moody’s/Fitch, on a par with with Abu Dhabi’s rating of Aa2/AA, trades ~4.7 credit notches cheap on our models.