(The following statement was released by the rating agency)
Jan 21 -
-- Austria-based telecom operator Telekom Austria AG is proposing to
issue junior subordinated hybrid securities.
-- We assess the proposed securities as having intermediate equity
content, under our criteria.
-- We are assigning our 'BB+' issue rating to the proposed securities to
reflect their subordination and optional deferability.
Standard & Poor's Ratings Services said today that it has assigned its 'BB+' long-term issue
rating to the proposed, undated, optionally deferrable, and deeply subordinated hybrid
capital securities to be issued by Austria-based telecom operator Telekom
Austria AG (BBB/Stable/A-2). We understand that the transaction volume is
subject to market conditions.
We consider the proposed securities to have intermediate equity content until
their first call date in February 2018 because they meet our hybrid capital
criteria in terms of their subordination, permanence, and optional
deferability during this period. In addition, this assumes that the amount of
issued hybrid securities will not exceed 15% of the group's capitalization in
the medium term. Under our criteria, we define capitalization as the sum of
financial debt, hybrids, and book equity adjusted for goodwill and after all
our other standard adjustments to debt and equity.
We arrive at our 'BB+' issue rating on the proposed securities by notching
down from our 'BBB' long-term corporate credit rating (CCR) on Telekom
Austria. 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 Telekom
Austria is investment grade (that is, 'BBB-' or above); and
-- An additional one-notch deduction for payment flexibility to reflect
the fact that the deferral of interest is optional and that the CCR is
The notching of the proposed securities reflects our view that there is a
relatively low likelihood that Telekom Austria will defer interest. Should our
view change, we may significantly increase the number of downward notches that
we apply to the issue rating.
In addition, in view of what we see as the intermediate equity content of the
proposed securities, we allocate 50% of the related payments on these
securities as a fixed interest charge and 50% as equivalent to 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,
gross-up, rating agency, accounting, or change of control events. Furthermore,
Telekom Austria can redeem them for cash as of the first call date in February
2018, and every five years thereafter. If any of these events occur, the
company intends to replace the instrument, although it is not obliged to do
so. In our view, Telekom Austria's statement of intent also mitigates the
likelihood of open market purchases by the company, as does its financial
policy which primarily aims to maintain a conservative balance sheet and an
investment-grade rating of 'BBB' with a stable outlook. To support its credit
metrics and balance sheet, the group cut the dividend per share in December
2011 by 50% to EUR0.38 for the fiscal year ended Dec. 31, 2011, and in September
2012 to EUR0.05 for the fiscal years 2012 and 2013.
The interest to be paid on the proposed securities will increase by 25 basis
points in February 2023, and a further 75 basis points in February 2038. We
consider the cumulative 100 basis points as a material step-up, which is
currently unmitigated by any commitment to replace the instrument at that
time. This step-up provides an incentive for Telekom Austria to redeem the
instrument on the February 2038 call date, in our view.
Consequently, in accordance with our criteria, we will no longer recognize the
instrument as having intermediate equity content after the first call date in
February 2018, because the remaining period until its economic maturity would,
by then, be less than 20 years. However, we will 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 Telekom Austria to call the instrument at that point. Telekom Austria's
willingness to maintain or replace the instrument in the event of a
reclassification of equity content to minimal is underpinned by its
aforementioned statement of intent.
KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S DEFERABILITY
In our view, Telekom Austria's option to defer payment of interest on the
proposed securities is discretionary. This means that the company 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 would
have to be settled in cash if Telekom Austria declares or pays an equity
dividend or interest on equal-ranking securities, and/or if Telekom Austria or
any of its subsidiaries redeems or repurchases common shares or equal-ranking
securities. We see this as a negative factor in our assessment of equity
content. That said, this condition remains acceptable under our rating
methodology because once the issuer has settled the deferred amount, it can
choose to defer payment on the next interest payment date.
Telekom Austria 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 proposed securities (and coupons) are intended to constitute direct,
unsecured, and deeply subordinated obligations of Telekom Austria. The
proposed securities rank junior to all present and future unsubordinated and
subordinated obligations of the company, and are only senior to share capital.
As per our criteria, however, we only notch the proposed notes down by one
notch despite their deep subordination.
RELATED CRITERIA AND RESEARCH
-- Unregulated Issuers' Hybrid Instruments: Rating Methodology And
Assessment Of Equity Content, March 17, 2011
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- Summary Analysis Telekom Austria AG, Jan. 21, 2013