TEXT-S&P rates SSE PLC proposed securities

Thu Aug 30, 2012 10:15am EDT

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-- U.K.-based vertically integrated utility SSE PLC is proposing to
issue junior subordinated hybrid securities. 
     -- We assess the new securities as having intermediate equity content, in 
line with SSE's existing hybrid capital.
     -- We are assigning our 'BBB' issue rating to the new securities to 
reflect their subordination and optional deferability.

LONDON (Standard & Poor's) Aug. 30, 2012--Standard & Poor's Ratings Services 
said today that it assigned its 'BBB' long-term issue rating to the perpetual, 
optionally deferrable, and subordinated capital securities being issued by 
U.K.-based vertically integrated utility SSE PLC (SSE; A-/Negative/A-2). The 
transaction volume is subject to market conditions. 

We consider the new securities to have intermediate equity content because 
they meet our criteria, for a period of five years, in terms of subordination 
and permanence, and are deferrable at the company's discretion. 

The issuance of the new hybrid securities does not affect our assessment of 
the intermediate equity content of SSE's existing subordinated hybrid capital 
of GBP750 million and EUR500 million, issued in September 2010. Our
classification 
of the existing hybrid instruments as having intermediate equity content is 
consistent with our criteria for determining equity content at the time those 
instruments were issued. Therefore, it does not conflict with our 
classification of the new securities.

We arrived at our 'BBB' issue rating on the new securities by notching down 
from our 'A-' long-term corporate credit rating (CCR) on SSE. The two-notch 
differential between the issue rating and the CCR reflects our notching 
methodology, which calls for:

     -- A one-notch deduction for subordination because the CCR on SSE is 
investment grade (that is, higher than 'BB+'); and
     -- An additional one-notch deduction for payment flexibility to reflect 
that the deferral of interest is optional and that the CCR is investment grade.

The notching of the new securities is linked to our perception of a relatively 
low likelihood of deferral. Should our perception change, we may increase the 
notching significantly and, in relative terms, more quickly than a revision of 
the CCR.

In addition, in view of what we see as the intermediate equity content of the 
new securities, we allocate 50% of the related payments on these securities as 
a fixed charge and 50% as an equivalent of a common dividend, in line with our 
hybrid capital criteria. The 50% treatment (of principal and accrued interest) 
also applies to our adjustment of debt.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S PERMANENCE
Although the securities are perpetual, they can be called at any time for tax, 
rating, or accounting events. Furthermore, SSE can redeem them for cash as of 
the first call date, five years after issuance, and every five years 
thereafter. If any of these events occur, the company intends, but is not 
obliged, to replace the instrument. In our view, this statement of intent 
mitigates SSE's ability to repurchase the notes on the open market, which we 
see as unlikely in our current base-case credit scenario.

The interest to be paid on the new securities will increase by 25 basis points 
in 2022 and a further 75 basis points in 2037. We consider that this 
significant step-up, unmitigated by any current commitment to replace the 
instrument at that time, provides an incentive for SSE to redeem the 
instrument on that call date. 

Consequently, in accordance with our criteria, we will no longer recognize the 
instrument as having intermediate equity content after the first call date in 
2017, because the remaining period until its economic maturity would, by then, 
be less than 20 years. However, we classify the instrument's equity content as 
intermediate until the first call date as long as we believe that the loss of 
the beneficial intermediate equity content treatment will not cause the 
instrument to be called at that point. SSE's willingness to maintain or 
replace the instrument in the event of a reclassification of equity content to 
minimal is underpinned by its statement of intent. 

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S DEFERABILITY
In our view, SSE's option to defer payment on the new securities is 
discretionary. This means that SSE may elect not to pay accrued interest on an 
interest payment date because it has no obligation to do so. However, any 
outstanding deferred interest payment will have to be settled in cash if at a 
general meeting SSE's shareholders decide on the payment of a dividend, or if 
SSE pays interest on, redeems, or repurchases equally ranking or junior 
securities. We see this as a negative factor. That said, this condition 
remains acceptable under our methodology because once the issuer has settled 
the deferred amount, it can still choose to defer on the next interest payment 
date.

SSE retains the option to defer coupons throughout the instrument's life. The 
deferred interest on the proposed securities is cash cumulative, and will 
ultimately be settled in cash.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S SUBORDINATION
The new securities (and coupons) are intended to constitute direct, unsecured, 
and subordinated obligations of SSE. The new securities rank senior to common 
and preferred shares and pari passu with the GBP750 million and EUR500 million 
securities issued in September 2010.

RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.

     -- Unregulated Issuers' Hybrid Instruments: Rating Methodology And 
Assessment Of Equity Content, March 17, 2011
     -- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

RATINGS LIST

New Rating

SSE PLC
 Junior Subordinated                    BBB
FILED UNDER: