Moody's places Taqa's ratings under review for upgrade following ADPower asset transfer deal

The transfer of water and electricity assets to have a positive impact on Taqa's financial profile

ADPower will own 98.6 per cent of Taqa shares following the deal, but a follow-on share offer could be made to broaden the company's investor base. Courtesy Taqa

Moody's Investors Service placed all the ratings of Abu Dhabi National Energy Company (Taqa) under review for an upgrade following its asset swap deal with Abu Dhabi Power Corporation(ADPower) that will create a regional utilities champion.

“The review for upgrade reflects Moody's view that a successful transfer of the ADPower assets would reinforce the strategic importance of Taqa for the government of Abu Dhabi,” the ratings agency said.

Taqa’s A3 long-term issuer rating and P-2 short-term issuer rating, among others, are likely to be upgraded following the deal with ADPower, Moody’s added.

Under the terms of the agreement revealed earlier this month, ADPower will transfer the majority of its water and electricity generation, transmission and distribution companies to Taqa in return for convertible shares in the latter.

“The additional assets would entrench Taqa's dominance over electricity generation and water desalination assets in Abu Dhabi and help mitigate longer-term uncertainties related to the expiry of certain purchase agreements.”

Moody’s also said the deal would help Taqa become a vertically integrated utility with total assets of around Dh200 billion and a diversified energy portfolio. Indirect government ownership would also increase to 98.6 per cent from 74.1 per cent following the deal.

The transfer would be positive for Taqa's standalone creditworthiness and could lead to the upgrade of its b1 Baseline credit assessment. While the actual financial strength of the assets to be transferred is unknown at this stage, Moody's expects the new assets to have a positive impact on Taqa's financial profile.

“The additional assets would improve the stability and predictability of Taqa's cash flow and dilute the company's exposure to its poorly performing oil and gas assets,” Moody’s said.

During the review, Moody's will focus on quantifying the impact of the transaction on Taqa's financial profile, as well as assessing any implications for the company's business, strategy and financial policies.

Separately, Fitch Ratings placed Taqa’s long term issuer default rating and senior unsecured debt rating of 'A' on Rating Watch Positive (RWP).

The move “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 Taq'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 the second half of 2020,” Fitch said.