Abu Dhabi National Energy Company TAQA proposed convertible notes assigned 'A' rating

The UAE dirham (Dhs)4.15bn notes have a very short conversion period, maturing on Sept. 1, 2008. Proceeds from the notes will be used to pay down short-term loans borrowed under TAQA's revolving credit facility and for other corporate purposes.

The proposed notes are rated two notches below the long-term corporate credit rating on TAQA. The notching reflects:

- One notch for the proposed notes' subordination; and

- One notch for the market risk resulting from the relative evolution of the share price and the conversion ratio of the instrument.

Existing shareholders - namely Abu Dhabi Water and Electricity Authority (ADWEA; 51%), the Farmer's Fund (24%), and Abu Dhabi retail and institutional investors (25%)--are expected to subscribe to the notes pro rata for their existing ownership levels, although it is possible that about 14% of the Farmer's Fund share could be replaced by ADWEA and/or other Abu Dhabi government affiliates. We expect ownership by direct or indirect government affiliates to increase very slightly on conversion of the notes in September, but we do not expect this to affect the corporate credit rating.

The notes will be settled in shares on maturity. While early redemption options at full face value exist, we understand from TAQA that such redemption would be entirely in the form of shares and could not be either partially or fully settled in cash.

Standard & Poor's assigns minimal equity content to the notes because their conversion price (Dhs2.00 per share) is lower than the market price at issuance (Dhs2.95 per share).

We consider that the potential dilutive impact of the discrepancy between the conversion price and market price at issuance could increase the chance of the company not issuing, or attempting to buy back the newly issued shares on conversion. The probability of the latter occurring diminishes the permanence of the capital to be issued on conversion, thereby leading to the assignment of minimal equity content.

Given the very short conversion period of the notes, we expect the assignment of minimal equity content to have little impact on our assessment of TAQA's financial profile. The 'AA-' corporate credit rating and 'BB' stand-alone creditworthiness already factor in the impact of the convertible issuance. The ratings also assume that the notes will be converted into shares in September 2008 and that these newly issued shares will remain outstanding in the future.