S&P downgrades Taqa credit rating

26 April 2017

Rating agency sees potential risks in government support for utility provider

Standard & Poor’s Global Ratings has cut the credit rating of Abu Dhabi National Energy Company (Taqa) by a notch, citing potential risks in government support for the utility and energy investment firm in case of a financially stressful scenario.

The US-based ratings agency has lowered Taqa’s long-term corporate credit rating to ‘A-’ from ‘A’ with a negative outlook. It also slashed the issue rating on the company’s senior unsecured debt to ‘BBB+’ from ‘A-’.

“The negative outlook reflects the risk of a multiple-notch downgrade if we revise down our assessment of the likelihood of government support [for Taqa],” according to S&P statement.

The rating agency said the substitution of a “favourable” put option with transfer rights to use land was a weaker mechanism for government support to Taqa.

The put arrangement gave Taqa an option to sell its oil and gas assets to another government-related entity at book value, which was removed last year. Abu Dhabi Water & Electricity Authority (Adewa), the main stakeholder in Taqa, gave the firm the leasehold rights for land where it operates power plants, to help offset the 2016 loss.

S&P said that the transfer of rights to use land will not contribute to the company’s cash flows and will not lead to reduction in leverage in the near-to-medium term. The rating action, it added, has also taken into consideration Taqa’s high leverage, with adjusted debt of about $22bn.

Taqa, which has fallen on hard times after crude prices slumped from mid-2014 peak of $115 had to book losses, cut jobs from its global operations and write off assets. The firm, which reported a 2016 loss of AED19bn is now considering selling its North American oil and natural gas operations to raise much needed cash.

“Although, we still believe that Taqa will benefit from considerable government support, the predictability of such full and timely government support in all circumstances is decreasing, in our view,” according to S&P.

However, Taqa said there was no change in the level of support it gets from the government.

“The transfer of leasehold land to Taqa in December 2016 demonstrated continued support from our majority shareholder, in line with a long track record of support in recent years,” its acting chief operating officer, Saeed al-Dhaheri, said in the statement in response to rating cuts.

Taqa’s majority shareholder over the years, has transferred 54 per cent ownership in eight independent water and power projects (IWPPs) in the UAE, injected AED2.7bn equity, transferred its interest in Sohar Aluminium smelter in Oman and has waived off shareholder loans and related interest worth its $795m, according to Taqa statement.

Adwea raised its stake in Taqa, earlier in April, to 74 per cent from 52.38 per cent. The company which the founding shareholder of the company has bought 21.67 per cent shareholding from Fund for the support of Farm Owners, another Abu Dhabi government-owned entity.

Taqa is also considering debt funding options including a formosa bond, sukuk and bank loans, a company spokesman told MEED on 4 April. It is raising funds to cover debt maturities due in October 2017 and January 2018.

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