Taqa Seeks to Remove Abu Dhabi From Rating Equation: Arab Credit

Abu Dhabi National Energy Co., a utility whose bonds would be rated junk without government backing, wants to reduce its debt burden within five years so its investment-grade status is justified by operations alone.

“Our aim over the medium term is to pay down our debt so that we can take ourselves to a stand-alone investment-grade credit rating,” Chief Financial Officer Stephen Kersley said in an interview at his Abu Dhabi office on Dec. 10. “At the moment we’re an investment-grade credit, but on the back of government support. We want to get our underlying metrics to investment grade.”

Without backing from its 75 percent owner Abu Dhabi, Taqa would be regarded as junk, according to Standard & Poor’s and Moody’s Investors Service. Instead, the utility is ranked A at S&P, the sixth-highest investment grade. Taqa, which last month bought stakes in North Sea oil fields from BP Plc, shaved 2.25 percentage points off its 10-year borrowing costs at a $1.25 billion bond sale this month, compared with a similar 2011 sale.

The company, which has $10 billion in outstanding bonds according to data compiled by Bloomberg, aims to reduce debt by eventually letting notes mature without refinancing or by buying back bonds, Kersley said. The North Sea additions are set boost daily output from that region by 21,000 barrels, or about 50 percent, helping the company, which gets about half of its revenue from oil and gas, generate revenue.

State Bailouts

The yield on its 5.875 percent notes due December 2021 bonds dropped 246 basis points, or 2.46 percentage points, since Taqa sold the securities in December 2011, to 3.42 percent today. That outpaced the 140 basis-point decrease to 4.61 percent on Dec. 6 in JPMorgan Chase & Co.’s CEMBI Broad Utilities Blended Yield index. Abu Dhabi’s $1.5 billion of 2019 bonds, rated AA at S&P, yield 1.98 percent, down 131 basis points this year.

Abu Dhabi, holder of most United Arab Emirates oil reserves, stepped in to bail out its biggest developer, Aldar Properties PJSC, last year with a $9.8 billion lifeline after the global credit crisis caused properties in the emirate to lose more than half their value. The government also granted $5 billion to Dubai in 2009 as part of a $20 billion rescue package to help its neighbor stave off a default.

Financial Support

The government has “made very clear, explicit statements that they would provide financial support on a timely basis to the four government-related entities,” Kersley said, naming Taqa, Mubadala Development Co. International Petroleum Investment Co. and Tourism Development & Investment Co. “The financial support is explicit, but short of a guarantee.”

Taqa aims to change the ratings equation as the assets it owns in the Middle East, India, North America and Europe generate revenue in the coming years. Utility assets usually provide stable, predictable returns, while most of Taqa’s hydrocarbon holdings are producing already, thereby avoiding exploration risk, Kersley said.

“We have about $30 billion in our balance sheet, about half are power and water assets and about half are oil and gas,” he said. “In oil and gas, the bulk of what we own are producing assets.”

U.K., Kurdistan

Hydrocarbon production from the new assets can add to income quickly, mitigating the effect of any additional investment costs, he said. The company’s sales rose 43 percent to 8.83 billion dirhams ($2.4 billion) in the third quarter, although it swung a loss due to higher operating expenses and one-time costs.

Taqa hasn’t modified a plan to invest about $2 billion a year on projects following this year’s purchases, including the $1.1 billion it’s paying BP for the offshore U.K. fields, Kersley said. The utility also spent about $600 million last month to gain control of the Atrush deposit in Iraq’s northern Kurdistan region, while it sold its interest in Kurdish producer WesternZagros Resources Ltd. for about $86 million.

“If you look at what we invested there, it’s net just north of $500 million if you net the proceeds of the sale of the Western Zagros stake,” Kersley said. “Just under $600 million was the amount we paid to buy in” to the Atrush block, he said.

‘Structural Shift’

Without state support, S&P’s grade would be eight levels lower at B+, the fourth-highest junk score, the ratings company said in a Nov. 30 note. Moody’s rating on Taqa would be four levels lower at Ba1, the highest junk score, Martin Kohlhase, Moody’s assistant vice-president, corporate finance, said by phone yesterday.

Achieving a stand-alone investment-grade rating would require “a real long-term structural shift, whereby they would have to over the years change their capital structure,” Kohlhase said. “Asset sales could be a part of the strategy if it is material.”

Taqa’s net debt to equity ratio is 536 percent, according to data compiled by Bloomberg. That compares with 308 percent for Qatar Electricity and Water Co.

Taqa will seek to cut the ratio of net debt to Ebitda--or earnings before interest, tax, depreciation and amortization--to 4 from 5.3 now, Kersley said. It will also aim to raise the Ebitda-to-net-interest ratio to 4.5 from less than 3.

“As a fixed income investor you’re looking for companies that manage the downside risk,” Kersley said. “We’re quite confident about the future and how we think our bonds will price and trade.”

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