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Sept 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Enel SpA’s (BBB+/Rating Watch Negative; RWN) multicurrency subordinated notes a final rating of ‘BBB-’ on RWN. The proposed notes qualify for 50% equity credit. A full 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, dated 13 December 2012 (‘Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis’, available on www.fitchratings.com).
The combined amount of the issue is approximately EUR1.7bn and is split among two tranches as follows:
EUR1.25bn at 6.5% coupon until the first reset date, with five-year first call date (2019) and final maturity date 2074
GBP400m at 7.75% coupon until the first reset date, with six-year first call date (2020) and final maturity date 2075
The effective remaining maturity, according to Fitch’s hybrid criteria is 2039 and 2040 for the EUR and GBP tranche, 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. According to Fitch’s criteria, the equity credit of 50% would change to 0% five years before the effective remaining maturity dates.
The issuer has a call option to redeem the notes on the first call date (2019 for the EUR tranche and 2020 for the GBP tranche). There will be a coupon step up of 25bps from 2024 and 2025 and a subsequent one of 75bps from 2039 and 2040 on the EUR and GBP tranche, respectively.
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. 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.
The RWN on Enel followed the announcement by the Spanish government on 12 July of new regulatory measures to permanently resolve the excess cost or tariff deficit (TD) generated by the Spanish electricity system that impacts utilities’ cash flows and expected credit metrics. We expect to resolve the RWN after reviewing the impact on metrics, rating guidelines and changes to Enel’s investment plans (see “Fitch Places Several Utilities with Significant Exposure to Spain on Rating Watch Negative” dated 16 July 2013 at www.fitchratings.com).
Regulatory Environment Remains Weak
Despite the Spanish government’s intention to eliminate the TD issue and revert to a fully cost-reflective system, Fitch believes that the regulatory environment in Spain remains weak.
Enel’s rating is not currently constrained by the rating of Italy (BBB+/Negative) or Spain (BBB/Negative). However, the ability to monetise the Spanish deficits through the securitisation of TD notes that benefit from a Spanish state guarantee remains highly correlated with Spanish sovereign risk.
Positive: Future developments that may potentially lead to a resolution of the RWN and affirmation of the ratings include:
- Limited impact of the approved regulatory measures with FFO adjusted net leverage substantially below 4.5x and FFO interest coverage above 4.0x on a sustained basis.
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.
Enel group’s available liquidity covers maturities up to 2015. Cash and available committed credit lines as of end of June 2013 amounted to EUR5.7bn and EUR15.4bn, respectively. Committed lines include EUR14bn expiring after 2014. According to Fitch’s forecasts, Enel group should remain free cash flow positive over 2013- 2014.
Following the hybrid bonds issue, 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.
Fitch rates Enel as follows:
Long-term IDR ‘BBB+'/RWN
Short-term IDR ‘F2’/RWN
Senior unsecured rating ‘BBB+'/RWN
Subordinated capital securities’ rating ‘BBB-'/RWN