(Repeat for additional subscribers)
Jan 13 (The following statement was released by the rating agency)
Fitch Ratings has assigned Enel SpA's (BBB+/Rating Watch Negative; RWN)
multicurrency notes a 'BBB-' rating on RWN. The notes qualify for 50% equity credit. A list of
Enel's ratings is at the end of this release.
The hybrid notes are deeply subordinated and rank senior only to Enel's share
capital, while coupon payments can be deferred at the option of the issuer.
These features are reflected in the 'BBB-'/RWN rating which is two notches lower
than Enel's 'BBB+'/RWN Long-term Issuer Default Rating (IDR) reflecting the
notes' increased loss severity and heightened risk of non-performance relative
to the senior obligations.
The equity credit reflects the structural equity-like characteristics of the
instruments, including subordination, maturity in excess of five years and
deferrable interest coupon payments. Equity credit is limited to 50% given the
cumulative interest coupon, a feature considered more debt-like in nature. This
approach is in accordance with Fitch's hybrid methodology, 'Treatment and
Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', dated
23 December 2013 available on www.fitchratings.com.
The combined amount of the issue is approximately EUR1.6bn and is split among
two tranches as follows:
EUR1bn at 5% coupon until the first reset date, with a six-year first call date
(2020) and final maturity date of 2075 GBP500m at 6.625% coupon until the first reset date, with
a seven year and eight months first call date (2021) and final maturity date of 2076.
The effective remaining maturity, according to Fitch's hybrid criteria is
January 2040 and September 2041 for the EUR and GBP tranches, respectively. From
these dates the coupon step-up is set to increase to 100bps from 25bps (which is
within Fitch's step up threshold of 100bps), but the issuer will no longer be
subject to the replacement language disclosing the company's intent to redeem
the instrument at its call date with the proceed of a similar instrument or with
equity. Fitch will remove the equity credit of the notes for its rating
forecasts five years before the effective maturity date related to the agency's
criteria is reached (i.e. equity credit will fall away for above detailed
tranches in 2035 and 2036).
There is no look back provision in the notes' documentation, which gives the
issuer full discretion to defer ongoing coupon payments on the notes. Deferrals
of coupons are cumulative, which results in 50% equity treatment and 50% debt
treatment of the hybrid notes by Fitch. Despite the 50% equity treatment, we
treat coupon payments as 100% interest. The company will be obliged to make a
mandatory settlement of deferred interest payments under certain circumstances,
including the declaration or a payment of a dividend.
KEY RATING DRIVERS FOR ENEL
Regulation and Weak Fundamentals
Regulatory risk and weak market fundamentals in Italy and Spain, Enel S.p.A's
second-largest market in Europe, will be Enel's main rating catalysts for 2014.
The ability to reduce debt through disposals will also be a key driver for the
improvement in credit metrics.
The RWN on Enel followed the announcement by the Spanish government in July 2013
of further regulatory measures to resolve the excess cost or tariff deficit (TD)
of the Spanish electricity system. This affects the cash-flow contribution from
Endesa's (BBB+/RWN/F2) Iberian operation, representing 24% of Enel's group
consolidated EBITDA for 2012.
Weak Spanish Regulatory Environment
Given the lengthy and highly political nature of Spanish energy reform and
structural drivers for the TD, Fitch believes that regulatory risk remains for
utilities operating in the country until the system is rebalanced and the
governance of the sector possibly improves. Some legal tail-risk remains as the
new measures may be tested in the courts. The outstanding system TD at end-2013,
although significantly reduced, was still EUR3.6bn.
Weak Electricity Market Outlooks
In Italy and Spain overcapacity and sluggish demand are likely to persist in
2014 on the back of fragile economic recovery prospects. This is only partially
compensated by Enel's continued growth in Latam markets, and leads to an overall
decline in Enel's EBITDA to EUR12.2bn at 9M13 from EUR12.8bn at 9M12 (-4.3%).
In 2013 Enel realised proceeds from disposals for EUR1.6bn, including EUR1.3bn
from the disposal of its stake in SeverEnergia. The impact of earnings dilution
from disposals is negligible. Enel is targeting a total of EUR6bn of disposals
in order to reduce leverage. Fitch forecasts group's funds from operations (FFO)
net leverage as of YE13 at 4.1x, and declining to below 4x by YE14 should Enel
successfully proceeds with its disposals plan.
Positive: Future developments that may potentially lead to a resolution of the
RWN and affirmation of the ratings include:
- FFO adjusted net leverage substantially below 4.5x and FFO interest coverage
above 4.0x on a sustained basis including the impact of new regulatory measures
Negative: Future developments that may potentially lead to a downgrade include:
- An increase of FFO adjusted net leverage above 4.5x and FFO interest coverage
below 4.0x on a sustained basis as a result of the approved measures.
- Deterioration of the operating environment or further government measures
substantially reducing cash flows.
LIQUIDITY AND DEBT STRUCTURE
Enel group's available liquidity covers maturities up to 2017. Cash and
available committed credit lines as of end-September 2013 amounted to EUR8.2bn
and EUR14.9bn, respectively. According to Fitch's forecasts, Enel group should
remain free cash flow positive over 2013-2014. Following the recent hybrid bond
issues, pro forma forecast FFO adjusted net leverage ratio should marginally
improve, while FFO interest cover may be slightly weaker due to the higher
average cost of debt.
Enel's ratings are as follows:
Long-term IDR 'BBB+'/RWN
Short-term IDR 'F2'/RWN
Senior unsecured rating 'BBB+'/RWN
Subordinated capital securities' rating 'BBB-'/RWN