TEXT-S&P puts Iberdrola rating on watch negative

Mon Oct 15, 2012 12:33pm EDT

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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