Moody's comments on TAQA's issuance of convertible bonds

The Dhs4.15 bn of convertible bonds mature on 1st September 2008 and will be converted into equity, thus strengthening TAQA's capitalisation.

Whilst this is overall supportive of the company's credit profile, it has been widely factored into TAQA's existing ratings of Aa2 / Stable Outlook and partially offset by expectations of further increases in debt in pursuit of international acquisitions, in line with TAQA's corporate strategy.

"Once the bonds are converted in September, TAQA's decision to raise fresh equity will provide support to its balance sheet, which had been accumulating substantial leverage over the past 24 months following a number of acquisitions", says Philipp Lotter, a Senior Vice President at Moody's Middle East Limited based in Dubai/DIFC and lead analyst of TAQA.

"We believe that all of TAQA's existing government-related shareholders will subscribe to the issuance and that the final government ownership stake in TAQA will remain largely unchanged following conversion", Lotter adds.

TAQA's Aa2 ratings are closely aligned to the sovereign ratings of Abu Dhabi and thus benefit from significant uplift for anticipated government support from TAQA's baseline credit quality of Ba1.

Accordingly, maintenance of the government's stake in the company and the continued strategic importance of TAQA to the government are overriding credit features.

The government holds its stakes in TAQA via the Abu Dhabi Water & Electricity Authority - ADWEA - (51%) and the Farmers' Fund (24%).

Whilst Moody's notes that the 24% stake currently held by the Farmers' Fund may face some dilution, this is likely to be replaced by ADWEA or other government-related entities, thus keeping the overall government stake in tact.

Moody's expects TAQA to balance its acquisitive growth strategy with adherence to certain financial metrics in order to support its current
baseline credit quality and suggests that the proceeds from the convertible bond should help TAQA's financial profile move closer to
these parameters.

This would entail retained cash flow to net debt to improve more firmly into a range of 8% to 10% from the current 6%, and funds from operations to cover interest costs at least 3 times initially, and improve beyond 4 times over the longer term from a currently around 2 times.

Moody's also expects debt to capital to be brought down from the current high eighties to below 75%.