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With total assets of nearly $15bn, Mubadala's most prominent investments include: a 51% stake in Dolphin Energy, which produces and transports natural gas via a pipeline from Qatar's North Field to the United Arab Emirates (UAE); a 50% stake in Emirates Aluminium Company (EMAL), which is currently building the world's largest aluminium smelter with an initial capacity of 700,000 tonnes per annum by 2010; and Masdar (Abu Dhabi Future Energy Company), a large-scale development centred around renewable energy that will include the world's first carbon-neutral city.
The company has also been granted substantial plots of real estate in Abu Dhabi for future development. In addition, Mubadala owns stakes in domestic companies such as ALDAR Properties and DU, the UAE's second integrated telecommunications company, as well as a growing international investment portfolio that includes stakes in Ferrari, AMD and Carlyle. In July 2008, Mubadala announced a substantial economic framework agreement with General Electric (GE) of the US that will lead to large-scale co-operation between the two companies.
The agreement will complement Mubadala's core development areas and attract additional expertise and best practices to Abu Dhabi.
Mubadala is 100% owned by the Abu Dhabi Government (rated Aa2/stable), and the company can only be dissolved once it has completed its mandate to develop the economy as per its Articles of Incorporation, after the end of a 50 year term, or by Emiri decree.
Despite having the legal status of a joint stock company, its function, control and strategic mission resemble more those of an economic development agency, and accordingly Moody's views Mubadala as a quasi-sovereign issuer.
Rating Rationale
Mubadala's credit ratings are aligned with those of the Government of Abu Dhabi (Aa2/stable) because Moody's views it as a quasi-sovereign entity. Mubadala is fully owned and essentially managed by the Government of Abu Dhabi: Mubadala's chairman is H.H. Sheikh Mohammed Bin Zayed Al Nahyan, the Crown Prince of Abu Dhabi, and five of its seven Management Board members, including its CEO, incorporate members of Abu Dhabi's Executive Council (the emirate's de facto cabinet of ministers).
The company was established in 2002 by an act of government (a decree of the Emir) and is an important vehicle of public policy - its primary mandate being to assist the diversification of Abu Dhabi's economy through domestic industrial investment. Mubadala's primary source of funding has been regular capital injections from the Government, which are expected to continue despite a gradual increase in third-party debt financing.
It has also been granted a substantial amount of free land from the Government, which is carried at zero value on Mubadala's balance sheet until economic use is assigned to it.
Although Mubadala does not have an explicit written guarantee, the Government has verbally assured Moody's that it stands fully behind the company.
Given Mubadala's development mandate, which often results in a longerterm view towards certain investments and adds a social objective to purely financial motives, and it being fully embedded in and integrated with the Government's economic policy, Moody's believes that any attempt to disaggregate Mubadala's underlying corporate credit risk factors from its sovereign risk factors (in line with Moody's joint default analysis for government related issuers) would be artificial, as one is fully linked to the other.
Accordingly, we view Mubadala as a quasi-sovereign issuer whose ratings are directly aligned with the Aa2 sovereign credit ratings of the Abu Dhabi government. Mubadala is expected to grow substantially over the coming years, in line with the growth of Abu Dhabi's non-oil economy. Future investments are likely to continue to focus on Mubadala's core industries. Indeed, Mubadala is currently ranked as the region's largest indigenous energy company by upstream value, according to a recent Wood Mackenzie report, due to its stake in Dolphin Energy, as well as exploration blocks in the Middle East and Southeast Asia.
In addition to large projects, Moody's expects Mubadala to continue to acquire financial stakes in international companies. Most of these investments are also likely to have a longer-term strategic motivation for Abu Dhabi, such as Mubadala's direct investment in Ferrari and its sponsorship of Ferrari's Formula One team, which in part has led to the final Formula One race of the 2009 season to be held in Abu Dhabi and the building of a Ferrari-themed leisure park on Yas Island.
Although Moody's believes that Mubadala will continue to be partially funded directly by the Government, it has recently also accessed capital markets in addition to bilateral and syndicated banking relationships in support of a more optimal funding mix. We will treat any such debt as quasi-sovereign liabilities that will be fully considered in our assessment of the Government's credit ratings.
Nonetheless, we expect any debt issuance at Mubadala to be in moderation and cognisant of its evolving business profile, thus adding limited strain on Mubadala's nascent cash flows, whilst larger investments continue to show a significant level of direct government funding.
Rating Outlook
Mubadala's ratings have a stable outlook, which reflects the stable outlook on the sovereign rating of the Government of Abu Dhabi.
Recent Results and Company Events For the first time, Mubadala has published full audited financial statements for its 2008 financial year, which has substantially enhanced transparency. This revealed revenues of Dhs6.7bn ($1.8bn), the bulk of which originated from its investment in Dolphin. Due to substantial fair value losses and impairments on some of its investments, Mubadala posted a year-end loss of Dhs11.77bn. However, excluding non-cash write-downs, cash flow was much improved with funds from operations (FFO) at Dhs3.4bn versus Dhs112m in 2007.
Acquisitions were primarily funded by government equity. Cash flow based metrics, such as FFO interest cover and retained cash flow (RCF) to debt, also strengthened to 6.4 times and 27.9%, respectively.
Structural Considerations
Given the nature of Mubadala's business and mandate, the majority of the company's debt is located at subsidiaries and project companies. Whilst Moody's notes that many of Mubadala's investments are highly strategic and therefore that the likelihood of Mubadala (on behalf of the government) supporting its projects is high, Moody's will take a case-by-case approach to whether projects and investments held by Mubadala would benefit from such support. Accordingly, all debt (including non-recourse debt) is consolidated.
Whilst this theoretically implies structural subordination within the Group, this is mitigated by the strong diversification of Mubadala's asset base, and - more importantly - the government agency role held by Mubadala, whereby Mubadala is seen as an arm of the state.
Liquidity
At year-end 2008, Mubadala held Dhs3.0bn of cash deposits and had a $2.0bn revolving credit facility, which was partially drawn.
Approximately Dhs10.6bn ($2.88bn) of its $13.1bn ($3.56bn) total debt was short term, consisting mainly of debt at the Dolphin and Pearl level. Since then, the company has successfully issued $1.75bn bonds off a Global Medium Term Note Programme, fully refinanced its Pearl debt and is close to finalising the refinancing of its Dolphin project, which represented the bulk of its short term maturities.
In addition to ongoing government funding, Moody's regards Mubadala's liquidity profile as robust, though also assumes that any shortfalls - should they arise - would be met by the government.
Drivers of Rating Change
Mubadala's ratings will move in line with the sovereign ratings of Abu Dhabi, provided that its current status, ownership structure and mandate are maintained.
Moody's highlights the importance of long-term stability both in Mubadala's ownership structure and in its government mandate, for its ratings, given the current early development nature of many of its businesses and financial profiles, which rely substantially on government funding and oversight.
Though not anticipated, any gradual de-linkage of Mubadala from the government would therefore result in a greater emphasis on stand-alone credit features, which are currently considerably weaker than the Aa2 assigned rating, but would be expected to change over the course of the years.
Posted by Rana Mesbah
