Fitch Upgrades Abu Dhabi Ports Company to 'AA-'; Removes UCO; Outlook Stable

Fitch Ratings has upgraded Abu Dhabi Ports Company PJSC's (ADP) Long-Term Issuer Default Rating (IDR) to 'AA-' from 'A+'.

Fitch has also upgraded ADP's euro medium-term notes programme (EMTN programme) and its USD1 billion 2031 senior unsecured notes to 'AA-' from 'A+'. ADP's ratings have been removed from Under Criteria Observation (UCO). The Outlooks are Stable.

RATING RATIONALE

The upgrade is driven by our assessment of the likelihood of exceptional support by Abu Dhabi government to ADP following our updated Government-Related Entities (GRE) Rating Criteria on 12 January 2024. ADP is rated one notch below Abu Dhabi (AA/Stable) based on a top-down rating approach, which reflects our assessment of its strong linkages with the Abu Dhabi government.

We assess ADP's Standalone Credit Profile (SCP) at 'bbb+', which reflects a largely contracted revenue base resulting in long-term cash flow visibility and stability, and synergies with industrial zones that should fuel the group's Khalifa Port (KP) operations.

KEY RATING DRIVERS

Risk Assessments

Fitch assesses ADP's GRE risk factors as follows:

Decision-Making and Oversight - 'Very Strong'

ADP is 75.42% owned by the government of Abu Dhabi via Abu Dhabi Developmental Holding Company (ADQ), an intermediate holding company with no material operations or debt and is used by the government to hold its interest in 25 public companies. ADQ through its representation on ADP's board provides oversight, control and monitoring of ADP's strategic planning and finances. The ADP board approves all major corporate activities, including annual budgets, investments and M&As.

Fitch does not expect changes to ADP's shareholding structure. Despite ADP's ordinary commercial law status, in Fitch's view, given the government's ownership and strong control of ADP, it is very likely that ADP's assets and liabilities would ultimately be transferred to Abu Dhabi in case of liquidation. ADP is an Emiri-decreed company, consolidated under Abu Dhabi's balance sheet.

Precedents of Support - 'Strong'

ADP has a record of receiving government support throughout its operating history in different forms, from asset endowment to equity injections and government grants for construction costs. No terms and conditions have been attached to historical subsidies and support provided by the government. There are no legal, regulatory or policy restrictions limiting the government in providing timely support to ADP.

Preservation of Government Policy Role - 'Strong'

ADP is perceived as a national security and strategic asset by the government in guaranteeing the nation's food security and maritime access. The government also expects ADP to play a key role in the diversification of the economy from the oil business as part of Abu Dhabi's economic vision.

Fitch views the replacement of ADP in its landlord role at the port as less straightforward than in the case of a port operator, as ownership of the assets would require the government to create a new entity to take over the relevant assets and to replace ADP as counterparty in long term contracts. Also, Fitch believes an ADP default would cause operational disruption, reduce its ability to fund its large expansionary plan with debt and result in the loss of a valuable financial investment.

Contagion Risk - 'Stronger'

ADP's debt is not guaranteed by the government. Nevertheless, Fitch views that as a GRE, a default by ADP would damage the government's reputation and could moderately increase the cost of funding for other GREs or the government.

Fitch assesses ADP's SCP risk factors as follows:

Revenue Risk

Volume: ' High Midrange'

ADP's diversified traffic mix between container and cargo volumes should provide some stability to volume. Overcapacity at some well-connected ports in the proximity of its Khalifa Port (KP) increases competition, particularly for container trans-shipment. However, the low weight of variable concession fees from trans-shipment volumes in overall revenue, coupled with contracted long-term relationships and co-investment from large shipping-liners in KP terminals, should soften competitive pressure.

Revenue Risk

Price: 'Stronger'

ADP's landlord operations feature protective contractual arrangements with key customers and price flexibility.

Infrastructure Development

Renewal Risk: 'Midrange'

Proven experience in completing large-scale investment on time and budget, and access to external funds, drive our 'Midrange' assessment. Capex linked to industrial zone developments is flexible and dependent on future volume growth and on the ability of ADP to attract long-term lease contracts.

Debt Structure: 'Midrange'

ADP's debt is senior unsecured, with no material covenant protections nor security package.

Financial Profile

ADP's 'bbb+' SCP reflects Fitch's estimate of net debt-to-EBITDA of 4.4x as of end-2023 after total net debt of AED11.8 billion was incurred to fund its organic capex programme and recent acquisitions. As of December 2023, ADP's available cash was AED3.3 billion, in addition to AED1.7 billion of credit lines available under its existing debt facilities. No debt maturities are expected in 2024.

PEER GROUP

The closest peer in our portfolio is DP World Limited (DPW, BBB+/ Stable), but DPW is much larger in size and geographically diversified. The rating differential is explained by Fitch's assessment of potential government extraordinary support to ADP, which results in a top-down approach by one notch below Abu Dhabi's rating.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of Abu Dhabi's sovereign rating

A perceived reduction in implied support and commitment from the government, as well as in the importance of ADP to the government's strategic objectives.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of Abu Dhabi's sovereign rating or an upward reassessment of one of the qualitative factors under our GRE Criteria

TRANSACTION SUMMARY

ADP owns and operates ports and terminals regionally and globally. In addition to the ports, ADP has other businesses ranging from logistics, marine services, maritime training, cruise infrastructure, to digital products (such as vessel management and payment products, which help automate the processing of vessels and cargo at the port).

CREDIT UPDATE

In 2023, revenue increased 112% year-over-year (YoY) to AED11.7 billion, largely fueled by expansion in maritime & shipping, ports, logistics, and digital clusters, alongside M&A activities. Excluding pass-through vessel trading revenues, growth was still a significant 77% YoY, or 23% on a like-for-like basis. EBITDA increased 23% YoY to AED2.7 billion.

Capex decreased to AED4.6 billion as part of a larger AED15 billion investment strategy planned for 2023-2027. Total assets increased 44% to AED55 billion, albeit at the cost of higher net debt at 4.4x EBITDA due to aggressive investments. ADP completed five M&As worth AED2.2 billion in 2023, focusing on strategic acquisitions and port concessions.

The Red Sea attacks have had varying impact on Abu Dhabi ports. Container operations remain unaffected due to a landlord business model and JV obligations, roll-on/roll-off volumes have increased, general cargo volumes are unchanged, while the cruise business has seen a negative impact in Aqaba but remains a small part of ADP's activities.

The maritime and shipping cluster saw a minor positive impact for SAFEEN Feeders rates and a significant positive impact for Transmar rates. Air freight demand has increased due to conversion from ocean freight, while ocean freight demand has been unstable with high rates. Overall, the effect on Abu Dhabi ports has been modestly positive.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

ADP's rating is one notch below Abu Dhabi's.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.