TEXT-S&P puts Iberdrola rating on watch negative
Overview -- On Oct. 10, 2012, we lowered our sovereign ratings on the Kingdom of Spain to 'BBB-/A-3'. The outlook remains negative. -- We consider that Spain-based utility Iberdrola has "high" exposure to domestic country risk as it derived about 47% of revenues from Spain in 2011. -- Furthermore, we see a risk that Iberdrola will struggle to achieve and maintain credit ratios commensurate with the 'BBB+' rating in a more challenging economic and fiscal environment. -- We are therefore placing our 'BBB+' corporate credit rating on Iberdrola on CreditWatch negative. -- The CreditWatch placement reflects the potential for a downgrade if we lower the rating on Spain to speculative grade. Furthermore, the CreditWatch reflects our uncertainty over whether Iberdrola will be able to achieve credit ratios commensurate with the rating in a deteriorating economic environment. Rating Action On Oct. 15, 2012, Standard & Poor's Ratings Services placed on CreditWatch with negative implications its 'BBB+' long-term corporate credit rating and senior unsecured issue rating on Spain-based utility Iberdrola S.A. and its subsidiaries Iberdrola USA, Iberdrola Renewables Holdings Inc., Scottish Power Finance U.S., Scottish Power Ltd., and related entities. We also placed on CreditWatch negative our 'mxAAA' long-term CaVal (Mexico) national scale issue rating on the Mexican pesos (MXN) 1.5 billion notes due 2018, issued by Iberdrola Finanzas S.A.U. and guaranteed by Iberdrola S.A. At the same time, we affirmed our 'A-2' short-term corporate credit ratings on Iberdrola, Iberdrola USA, Scottish Power Scottish Power Ltd., and related entities. Rationale The CreditWatch placement follows the downgrade of the Kingdom of Spain to 'BBB-/A-3' from 'BBB+/A-2' on Oct. 10, 2012. The outlook on Spain remains negative. (See "Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative," published on RatingsDirect on the Global Credit Portal.) We assess Iberdrola as having "high" exposure to domestic country risk as it derived about 47% of revenues from Spain in 2011. Furthermore, we see risks that Iberdrola will struggle to achieve and maintain credit ratios commensurate with the 'BBB+' rating, namely, Standard & Poor's-adjusted funds from operations (FFO) to debt of more than 20%, in a more challenging economic and fiscal environment. The group is due to announce its strategic plan on Oct. 24, 2012. We will assess whether this plan will be sufficient to counterbalance the potential downside in our forecasts as a result of ongoing weak power market fundamentals in Spain and the U.K.; increased political risk; delays in tariff deficit securitization; and/or a potential electricity market reform that could have adverse consequences for Iberdrola. According to our criteria for rating non-sovereign entities in the European Economic and Monetary Union, there is a maximum possible rating differential of two notches between the ratings on Iberdrola and those on its related investment-grade sovereign. Under the same criteria, in a theoretical scenario where we lower the sovereign rating to speculative grade, we would allow the rating on Iberdrola to exceed the sovereign rating by a maximum of one notch. These criteria apply to Iberdrola because we assess it as having "high" exposure to domestic country risk. We base our assessment on the utility sector's "high" sensitivity to country risk, and the fact that Iberdrola currently derives almost one-half of its revenues from Spain. We believe that the challenging macroeconomic and business environment in Spain continues to weaken Iberdrola's business risk profile, which we continue to assess as "strong." We anticipate that the group's EBITDA from Spain will decline in 2012 due to intensifying pressure on the profitability of its domestic operations in both the liberalized and regulated markets. We view the revenues from Spanish regulated networks as more robust because they are currently immune to volume and price risks and are partially hedged against inflation and sovereign bond yield increases. We believe that regulatory risk is increasing, however, as fiscal and economic challenges rise. A number of factors continue to underpin our assessment of Iberdrola's "strong" business risk profile. Most importantly, the group benefits from cash flow stability of about 70% of group EBITDA (at financial year-end Dec. 31, 2011) from regulated and quasi-regulated renewable operations. Furthermore, the group benefits from significant scale and geographic diversity from its vertically integrated utility operations in the U.K., the U.S., and Latin America. On Sept. 14, 2012, the Spanish government announced preliminary plans for an electricity sector reform. We view positively the fact that the measures aim to spread the cost of eliminating the tariff deficit between the end customers and the government, and propose to eliminate future tariff deficit accumulation. The tariff deficit consists of liabilities that the Spanish government owes the utilities for past and current system costs that were not passed on to consumers. We are concerned, however, that the government's assumptions of successful market liberalization and achievement of full pass-through of a revenue tax in a situation of economic hardship and a heavily oversupplied electricity market are optimistic, at least in the near term. We also note that the plans are yet to be drafted into a bill and approved by Parliament. We continue to assess Iberdrola's financial risk profile as "significant," based on the group's relatively high leverage and credit metrics that are below our rating guidelines. We believe that Iberdrola's management is committed to reducing debt leverage, as evident in the past by asset disposals, the moderation of capital expenditure (capex), and the payment of scrip dividends. We will assess whether, under the new strategic plan to be announced on Oct. 24, 2012, Iberdrola is able to achieve 20% adjusted FFO to debt on a sustainable basis. We see this ratio as commensurate with the 'BBB+' long-term rating, as long as the rating on Spain remains the same. Liquidity The short-term corporate credit rating on Iberdrola is 'A-2', and reflects the long-term corporate credit rating and our view of Iberdrola's "strong" liquidity profile under our criteria. Over the next 12 and 24 months, we forecast that liquidity sources--mainly comprising operating cash flow and available bank lines--will cover projected uses--comprising capex, debt maturities, and dividends--by at least 1.5x and 1.0x, respectively. Our assessment of the group's liquidity is underpinned by: -- Iberdrola's access to unrestricted short-term cash and short-term marketable securities of about EUR2.1 billion as of June 30, 2012; -- A total of about EUR7 billion in undrawn committed credit lines with maturities longer than 12 months; and -- Our forecast that Iberdrola will generate adjusted FFO of about EUR6 billion in 2012. This compares with our forecast that, over the next 12 months, Iberdrola faces: -- EUR3.5 billion in capex under our base-case scenario; -- Dividend payments of about EUR1 billion (part of which could be non-cash through a scrip dividend); and -- About EUR3.5 billion in short-term debt maturing over the next 12 months. About 40% of these maturities include commercial paper and short-term facilities that the group expects to roll over as it has done in the past. However, this depends on the strength of the Spanish banking system and its ability to support such a roll-over of short-term debt. Further supporting our opinion of Iberdrola's "strong" liquidity position is the group's ability to absorb high-impact, low-probability events and maintain a limited need for refinancing. Additional supports are the group's flexibility to reduce capital spending or sell assets; its sound bank relationships with a diversified pool of counterparties; its solid standing in credit markets; and its generally prudent risk management. CreditWatch The CreditWatch placement reflects the negative outlook on the long-term rating on Spain and our view of the risk that Iberdrola might not be able to achieve credit metrics commensurate with the 'BBB+' rating over the medium-to-long term. We aim to resolve the CreditWatch once we assess the group's strategic plan to be announced on Oct. 24, 2012. We will likely lower the rating on Iberdrola by one notch if we consider that Iberdrola could struggle to achieve and maintain adjusted FFO to debt of about 20%. This could occur if weaker conditions than we forecast in the group's key markets, Spain in particular, weigh on its profitability. In addition, a potential increase in political risk, for example, due to government policies that aim to extract cash from power utilities in Spain, could also prevent Iberdrola from achieving the guideline ratio. Furthermore, if we downgrade Spain by one notch, we will likely lower the long-term rating on Iberdrola by two notches, and the short-term rating by one notch. This is because under our criteria, there is a maximum allowed differential of one notch between the ratings on Iberdrola and those on Spain, since we assess Iberdrola as having "high" exposure to domestic country risk. That said, in the event of a further downgrade of Spain, we would evaluate Iberdrola's stand-alone credit quality separately from that of Spain. We would likely remove the ratings from CreditWatch and affirm them if we come to believe that, as a result of measures undertaken as part of Iberdrola's updated strategic plan, the group can sustain credit metrics commensurate with the ratings. Related Criteria and Research -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept.18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 -- Credit FAQ: What's Behind Our Rating Actions On Spanish Power Utilities?, April 4, 2012 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Iberdrola S.A. Scottish Power U.K. PLC Scottish Power U.K. Holdings Ltd. Scottish Power Ltd. Scottish Power Investments Ltd. Scottish Power Generation Ltd. Scottish Power Energy Retail Ltd. Scottish Power Energy Networks Holdings Ltd. Scottish Power Energy Management Ltd. SP Transmission Ltd. SP Manweb PLC SP Distribution Ltd. Iberdrola USA Corporate Credit Rating BBB+/Watch Neg/A-2 BBB+/Stable/A-2 Iberdrola Renewables Holdings Inc. Scottish Power Finance U.S. Corporate Credit Rating BBB+/Watch Neg/-- BBB+/Stable/-- Iberdrola S.A. Senior Unsecured Debt* BBB+/Watch Neg BBB+ Iberdrola Finance Ireland Ltd. Senior Unsecured Debt BBB+/Watch Neg BBB+ Iberdrola Finanzas S.A.U. Senior Unsecured Debt* mxAAA/Watch Neg mxAAA Senior Unsecured Debt* BBB+/Watch Neg BBB+ Iberdrola International B.V. Senior Unsecured Debt* BBB+/Watch Neg BBB+ Iberdrola USA Senior Unsecured Debt BBB+/Watch Neg BBB+ SP Manweb PLC Senior Unsecured Debt BBB+/Watch Neg BBB+ SPD Finance UK PLC Senior Unsecured Debt BBB+/Watch Neg BBB+ Scottish Power U.K. PLC Senior Unsecured Debt BBB+/Watch Neg BBB+ New Rating; CreditWatch/Outlook Action Scottish Power U.K. PLC Senior Unsecured Debt BBB+/Watch Neg Ratings Affirmed Iberdrola International B.V. Commercial Paper* A-2 *Guaranteed by Iberdrola S.A. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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