OREANDA-NEWS. Fitch Ratings has affirmed Mubadala Development Company PJSC's (Mubadala) Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating at 'AA' and Short-term Foreign Currency IDR at 'F1+'. The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed MDC GMTN B. V.'s global medium term note programme, which is unconditionally and irrevocably guaranteed by Mubadala, and its outstanding notes and euro commercial paper at 'AA' and 'F1+', respectively.

Fitch rates Mubadala using a top-down rating approach under its 'Rating of Public-Sector Entities - Outside the United States' criteria, to reflect the credit links between Mubadala and its sole shareholder (the sponsor, under the PSE criteria), the Emirate of Abu Dhabi (AA/Stable/F1+), and equalises its ratings with those of its shareholder. Mubadala aims at diversifying Abu Dhabi away from oil and becoming a significant source of revenue for the government. However, Fitch considers that this is unlikely to happen over the rating horizon.

The ratings reflect Fitch's expectation of extraordinary support from Mubadala's shareholder, which exercises direct control and oversight of the entity. The Stable Outlook reflects that on the shareholder. Fitch considers that the strong links will remain in the context of the merger plan recently announced by the state between Mubadala and International Petroleum Investment Company (IPIC, AA/Stable/F1+).

KEY RATING DRIVERS

Legal Status (Mid-Range attribute)

Mubadala is a public joint stock company, 100% owned by the Emirate of Abu Dhabi and is the state's vehicle for business development and economy diversification. Its institutional mission is to provide support to the national economy, by developing and connecting industry sectors, establishing critical healthcare, education and business infrastructure, while taking a strategic position in a broad range of businesses and industries both nationally and internationally (currently in more than 20 countries). Fitch does not expect these features to significantly change in the foreseeable future.

Integration (Stronger attribute)

Equity injections and perpetual loans demonstrate the close links between Mubadala and Abu Dhabi's finances, in addition to (indirect) intermediation of oil revenue and other government assets. Of its total assets of AED246.4bn and total equity of AED174.0bn as end-2015, Mubadala has received AED141.5bn of shareholder contributions, AED18.4bn of which in the form share capital issuance. For these contributions received since inception, repayments are at the discretion of the board of directors, who do not intend to repay such amounts and, in case of dissolution of the company, these will be treated pari passu with the share capital. Therefore, these sums can be assimilated to the actual AED28.6bn share capital, reflecting the company's key role in intermediating oil and other government relevant assets.

Control (Stronger attribute)

The seven members of Mubadala's board of directors are appointed by the sole shareholder (while two are also members of the Executive Council, including H. H. Sheikh Mohamed Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces), and therefore the shareholder plays an active role in approving the company's financial statements and retains control over the company's strategic decisions. The tight control is also evidenced by the statement of full and unconditional support that the government has made in favour of its flagship sovereign-owned entities, including Mubadala, IPIC and Tourism Development & Investment Company (TDIC). Following the announcement of the merger between Mubadala and IPIC made by the shareholder in June and to be finalised in the forthcoming future, Fitch believes that the likelihood of extraordinary support will not weaken.

Strategic Importance (Stronger attribute)

Although the government does not provide an explicit guarantee for the company's liabilities, Fitch continues to believe that Mubadala is particularly important in implementing Abu Dhabi's policy for economic development and diversification, notably through a progressively lower dependence on hydrocarbons as the main source of national revenue, while delivering significant financial investments and participations returns to Abu Dhabi's general government budget. The limited size of Mubadala's total financial debt relative to national GDP (5%) means extraordinary support from Abu Dhabi, in case of need, is very likely. We consider the merger between Mubadala and IPIC will not weaken the strategic importance as the state's assets diversification will improve.

Operations

The group has delivered solid growth in revenues over the last three years, although operating profitability was negatively impacted due to higher cost of sales of goods and services, and is not expected to recover soon. In details, Mubadala's revenues increased 4.3% to AED34.1bn in FY15 from AED 32.7bn in FY14 (semiconductor wafers, aircraft maintenance/repairs/component leasing/sales, and hydrocarbons making up 84.1% of the consolidated revenues).

Management expects that future capital and investment expenditure will largely be funded by operating cash flow, borrowing from third parties and selective asset monetisations. As of end 2015, total financial debt remained stable compared with the previous year at AED40.5.bn, with a leverage ratio (calculated as the debt/ equity) of 24%, on a downwards trend since 2011 when it was at 42% and a gearing ratio (net debt/net debt + equity) to 14% in 2015 (or 9% when also including long-term deposits, available with no loss on the principal) from 22% in 2011. Mubadala's liquidity position is solid, with readily available cash and cash equivalents at AED13.4bn plus long-term deposits of approximately AED12.0bn, and has been totally covering recourse debt on average since 2011.

RATING SENSITIVITIES

Mubadala's ratings are equalised with those of Abu Dhabi. Therefore, any change in the ratings of the shareholder would be reflected in Mubadala's ratings.

Conversely, a sovereign downgrade or an adverse change in Mubadala's legal framework leading to weaker support from or diminished integration with the shareholder could also trigger a downgrade.