(The following statement was released by the rating agency)
Jan 04 -
-- France-based vertically integrated utility Veolia Environnement S.A. is proposing to issue junior subordinated hybrid securities.
-- We assess the proposed securities as having intermediate equity content.
-- We are assigning our 'BBB-' issue rating to the proposed securities to reflect their subordination and optional deferability.
Standard & Poor's Ratings Services said today that it assigned its 'BBB-' long-term issue rating to the proposed, undated, optionally deferrable, and deeply subordinated hybrid capital securities to be issued by France-based vertically integrated utility Veolia Environnement S.A. (Veolia; BBB+/Negative/A-2). The transaction volume is subject to market conditions.
We consider the proposed securities to have intermediate equity content until their first call date in April 2018, because they meet our hybrid capital criteria in terms of their subordination, permanence, and optional deferability during this period.
We arrive at our 'BBB-' issue rating on the proposed securities by notching down from our 'BBB+' long-term corporate credit rating (CCR) on Veolia. 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 Veolia 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 investment grade.
The notching of the proposed securities reflects our view that there is a relatively low likelihood that Veolia will defer interest. Should our view change, we may significantly increase the number of downward notches that we apply to the issue rating, and more quickly than we might take a rating action on the CCR.
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 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, or accounting events. Furthermore, Veolia can redeem them for cash as of the first call date in April 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, Veolia's statement of intent also mitigates the likelihood of open market purchases by the company, as do its financial strategies aimed at strengthening its balance sheet and our forecast of the company's continued capital requirements as per our current base-case credit scenario.
The interest to be paid on the proposed securities will increase by 25 basis points in April 2023, and a further 75 basis points in April 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 Veolia to redeem the instrument on the April 2038 call date.
Consequently, in accordance with our criteria, we will no longer recognize the instrument as having intermediate equity content after the first call date in April 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 Veolia to call the instrument at that point. Veolia'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, Veolia's option to defer payment of interest on the proposed securities is discretionary. This means that Veolia 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 Veolia declares or pays an equity dividend or interest on equal-ranking securities, and/or if Veolia or its subsidiaries redeem or repurchase 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.
Veolia 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 Veolia. The proposed securities rank junior to all unsubordinated obligations, ordinary subordinated obligations, and prets participatifs, and are only senior to common and preferred shares. As per our criteria, however, we only notch the proposed notes down by one notch despite their deep subordination.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Unregulated Issuers' Hybrid Instruments: Rating Methodology And Assessment Of Equity Content, March 17, 2011
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
Veolia Environnement S.A.
Junior Subordinated Debt BBB-