Fitch Ratings has affirmed Abu Dhabi Future Energy Company PJSC's (Masdar) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A+' with Stable Outlooks.

The ratings have been removed from Rating Watch Evolving.

The rating actions follow the company's reorganisation.

Fitch rates Masdar on a top-down basis with a two-notch differential with Abu Dhabi (AA/Stable). This reflects Fitch's view that Masdar was created to perform a highly strategic public mission for the Emirate of Abu Dhabi and that the latter has a clear interest in ensuring Masdar's financial stability. This translates into a support score of 20 points out of a maximum of 60 points according to Fitch's Government-Related Entities (GRE) Rating Criteria.

Masdar's Standalone Credit Profile is 'a-' and reflects a leverage ratio (net adjusted debt-to-EBITDA) expected to remain around 4x in Fitch's rating case scenario, amid moderate volatility of the main revenue and cost items.

KEY RATING DRIVERS

Status, Ownership and Control:

Masdar is a commercial law company indirectly owned by the Emirate of Abu Dhabi, through intermediate holding companies, Mamoura Diversified Global Holding PJSC (AA/Stable) Abu Dhabi National Energy Company PJSC (TAQA, AA-/Stable) and Abu Dhabi National Oil Company (ADNOC). Fitch expects the Abu Dhabi government to retain full indirect ownership of the company in the medium term, with oversight of operations maintained through the intermediary shareholders.

Fitch considers the government exercises broad control over the company's strategy and operations, notably with the presence of a Federal Cabinet member on its board and its investment strategy is discussed as the highest levels of the government. Masdar's investment and borrowing are subject to the approval of its shareholders. The change of ownership has had a neutral impact on this assessment.

Support Track Record:

Fitch considers that Masdar has received consistent support since its inception in 2007, leading to very low reliance on external debt despite the extent of its projects. State support, in the past mostly dedicated to the development of Masdar City, has taken the form of initial in-kind contributions of land, regular direct government grants, as well as equity injection. With a narrower focus on renewables and clean energy investment, and a commitment from the government to reach 100GW produced by Masdar by 2030, significant future equity injections are expected. This is to limit leverage at the holdco level and maintain a strong underlying financial profile.

Fitch considers there are no legal or policy restriction to timely government support to Masdar if needed.

Socio-Political Implications of Default:

Fitch considers that a default by Masdar on its financial obligations is unlikely to endanger the provision of an essential public service or have strong economic repercussions for Abu Dhabi. Masdar is of modest size compared with other GREs in Abu Dhabi and relies minimally on external debt to fund its operations. At present, most operations are funded at a project level and are non-recourse, therefore a default of this debt would not constitute a default of Masdar. Fitch understands that short-term service disruptions could result from Masdar being unable to continue its operations, but in the medium term substitutes exist among Abu Dhabi's other GREs.

Fitch understands that Masdar is of great political importance for the government due to its central role in Abu Dhabi's Economic Vision 2030, set up in 2009 to lead the country's energy transition, and due to its high visibility among Abu Dhabi's GREs. It is also key to future policy missions, with international commitments made with other countries on future renewables projects through Masdar as well as being integral to Abu Dhabi achieving the target of net zero by 2050.

Financial Implications of Default:

Despite the Masdar brand being closely associated with the Emirate of Abu Dhabi by market participants, Fitch does not view Masdar as a proxy-funding vehicle for Abu Dhabi as it does not incur debt to finance core government responsibilities.

Fitch considers that a default by Masdar on its financial obligations, due to its shareholders and its proximity with the government could have a moderate impact on the availability and cost of finance by the government and other GREs relying on government support.

Masdar has not been singled out by the government as more likely to receive exceptional support like some of the larger Abu Dhabi's GREs, such as Mamoura, have been in the past.

Standalone Credit Profile

Fitch assesses Masdar's SCP at 'a-', reflecting the combination of leverage expected to remain below 4x in our rating-case scenario and a 'Midrange' assessment of the Revenue Defensibility and Operating Risk qualitative risk factors.

The notch-specific 'a-' SCP is derived from the leverage ratio being in the higher end of the band for 'a' category according to the GRE notching guideline table ('a' category corresponding to leverage between 0x and 4x).

Revenue Defensibility

Masdar's revenue mix has changed as a result of the merger. Previously, Masdar's revenue came from two main sources - rent-related income from the management of Masdar City and financial income from its investments in clean-energy projects - which are supported by strong growth prospects linked to the increase in global investments in the energy transition. However, it remains exposed to the inherent volatility of the energy market and increased competition among Gulf countries to attract foreign investments, in Fitch's opinion.

Following the reorganisation of the entity it will no longer receive rents from Masdar City. However, there will be increased investment income from several US-based assets transferred from Mubadala during the reorganisation process. Masdar is also expected to expand significantly and with government support through equity injections, considerably increasing the level of investment income generated by Masdar.

Masdar's financial income from its investments in clean energy projects should benefit from the global surge in investments in the sector amid increased climate change awareness. A material share of the dividend income received by Masdar comes from the Dudgeon Offshore Wind Limited project (issue rating: A-/Stable) in the UK: Fitch views positively that it rates an issue by this project 'A-' and that it does not represent a constraint for Masdar's SCP.

Masdar's revenue are partly secured by long-term contracts, providing some predictability.

Operating Risk

Fitch considers Operating Risk a 'Midrange' factor for the assessment of Masdar's SCP. It is linked to the combination of 'Midrange' operating costs, linked to moderate volatility of expenses and a material capex programme, and 'Midrange' resource management.

Fitch considers that Masdar's operating cost drivers are well identified, with moderate potential volatility. Staff costs remain the main cost item and have been growing by 5% on average below revenue growth. Masdar has a material capex programme linked to planned investment in clean energy projects, but it also has some flexibility to scale down if the macroeconomic environment remains uncertain.

Financial Profile

There have been significant changes to the underlying cashflows for Masdar and how it operates. We expect there to be continued high demand domestically and internationally for renewable energy products, with oil and gas supplies interrupted by the conflict in Ukraine. We expect Masdar's financial profile to remain strong, with significant inflows of cash from equity injections and limited leverage levels at a holdco level. Most costs and revenue streams will be accounted for on an equity, project-by-project basis with dividends flowing to the parent company. Some holdco level debt is expected to be issued in Fitch's rating case, increasing net debt/EBITDA ratios towards around 3.5x, but still within the Strong assessment, and the 'a' category.

Derivation Summary

Fitch considers Masdar a GRE of Abu Dhabi, despite its indirect ownership by the Emirate, and looks through the three intermediary holdings (Mamoura, TAQA and ADNOC).

The combination of a GRE score of 20 points and a SCP of 'a-' (i.e. four notches away from the sovereign) leads to a top-down rating approach minus 2, leading to a Long-Term IDR of 'A+'.

No criteria variation was required for this assessment as the indirect owner remains Abu Dhabi, Fitch believes there has been no dilution of control and Masdar still fulfils a public policy mission.

Short-Term Ratings

As an issuer rated on a top-down basis from Abu Dhabi , Masdar is assigned a 'F1+' Short-Term IDR.

Debt Ratings

Non-recourse project finance lending across Masdar's portfolio totals USD5.6 billion gross, of which Masdar's net share is USD2.3 billion.

Key Assumptions

Masdar has seen significant changes occur this year, with revision of its policy goals and a change to its ownership structure. As a result we expectto significant shifts in the way its operates and its projected revenue and cost growth. The focus will be on clean energy investments completed mainly on a project-by-project basis, with non-recourse debt and higher levels of ownership. Cash flows are expected to increase materially due to further equity investment by shareholders and the UAE state.

Due to this change, we have used the business plan provided by the entity as our base case scenario. We have applied stresses to this base case scenario to reach our rating case.

Liquidity and Debt Structure

Masdar's liquidity is mainly ensured by a high level of unrestricted cash at end-2021 reaching AED400 million.

Issuer Profile

Masdar is a GRE of Abu Dhabi focused on investments in clean or renewable energy.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Due to the GRE criteria's notching guideline table Masdar's IDR is sensitive to both its sponsor's IDR and its SCP.

A downgrade of Masdar's IDR could result from a downgrade of Abu Dhabi by two notches to 'A+' or from a deterioration in Masdar's leverage ratio to above 4x on a sustained basis in our rating-case scenario.

A revision of Fitch's assessment of state support could also lead to a downgrade.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Masdar's IDR could result from an upgrade of Abu Dhabi's IDR by two notches to 'AAA' or from an improvement in Masdar's leverage ratio to below 2x on a sustained basis in our rating-case scenario.

A revision of Fitch's assessment of state support could also lead to an upgrade.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Public Ratings with Credit Linkage to other ratings

The ratings are credit-linked to those of Abu Dhabi.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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