When Moody’s Investor Services and Fitch Ratings recently assigned first-time credit ratings that place Masdar in the investment grade category, it marked the start of a new era of growth for the renewable energy and sustainable development company.
Moody’s and Fitch issued long-term foreign and local-currency Issuer Default Ratings of A2 and A+ respectively, both with a stable outlook.
But how does Masdar, a sustainability subsidiary of Mubadala Investment Company and one of the world’s fastest-growing companies in the sector, benefit from a credit rating?
Credit rating agencies essentially evaluate the creditworthiness of commercial and sovereign entities. They offer forward-looking opinions on the relative ability of an entity to meet its financial commitments and play a key role in providing access to financial markets and helping investors with their decision-making.
Debt, such as a bond or a loan, is considered investment grade if it has been assigned a credit rating of Baa3 or higher by Moody's and BBB- or higher by Fitch. Debt that is not rated high enough to be considered investment grade is referred to as speculative or “junk”.
Masdar’s ratings of A2 and A+ place it firmly in the investment grade category and indicate that the next dollar of debt issued would have a relatively low likelihood of not being repaid.
It is common for companies planning to issue debt to obtain a rating as it opens up a larger pool of liquidity by allowing access to investors that require credit ratings to establish their portfolio allocation. There is also empirical evidence to show that credit ratings improve company valuations by removing any discount related to the uncertainty of its creditworthiness.
Masdar’s credit ratings represent a major milestone for the company, which has innovated and progressed exponentially since its inauguration 15 years ago, and opens up a new chapter of advancement.
By determining these ratings, the agencies have highlighted Masdar’s geographic and sector diversification, track record and expertise, as well as strong backing from both Mubadala and Abu Dhabi.
The ratings also demonstrate the strength of Masdar’s core business approach, which is characterised by a proven governance framework, strong cash generation, low exposure to market volatility and limited reliance on external debt.
These factors, together with its future growth prospects as an Abu Dhabi-based company, were major factors in the rating assessments by Moody’s and Fitch, and help shine a light on Masdar’s credibility in financial markets.
As Masdar ramps up its global investment strategy with an eye on new projects, the ratings have created a strong platform for accessing global capital markets in the future. At the same time, the company is embracing transparency by making the ratings public.
With a portfolio of sustainable real estate and renewable energy assets, combined with the crucial role it is playing in the diversification of the Abu Dhabi economy, Masdar is now primed for accelerated growth worldwide.
Niall Hannigan is the chief financial officer of Masdar