(The following statement was released by the rating agency)
Dec 10 - Fitch Ratings has affirmed Enagas S.A.’s Long-term Issuer Default Rating (IDR) at ‘A-'. Fitch has also assigned Enagas Transporte, S.A.U., the wholly owned operating subsidiary (opco), a Long-term IDR of ‘A-'. The Outlook on the IDRs is Negative. A full list of rating actions is below.
Enagas’ ratings are constrained by the sovereign, largely due to lack of geographical diversification. Enagas’ credit profile is supported by its low business risk as the natural monopoly gas transmission owner and operator in Spain and good predictability of its regulated earnings with minimal exposure to volume and price risks.
- Ratings Constrained
The IDRs of Enagas and its opco remain constrained by the sovereign rating of the Kingdom of Spain (‘BBB’/Negative). According to Fitch’s approach, primarily domestic issuers in the eurozone can be rated up to two notches above their sovereign (at Spain’s current rating level). Enagas generated more than 95% of its earnings in 2011 in Spain.
The Negative Outlooks match that on the sovereign rating and indicate downside rating potential in the event of a sovereign downgrade.
- Stronger Unconstrained Profile
Fitch views Enagas’ unconstrained credit profile as commensurate with a ‘A’ IDR, reflecting the consolidated credit metrics, structural subordination of its creditors to those at opco level, and the regulatory ring fence around opco, including lack of upstream guarantees. Opco’s unconstrained credit profile is commensurate with a ‘A+’ IDR, due to its stronger financial profile. It holds the bulk of the regulated assets and earnings but holds or guarantees only around 70% of Enagas’ consolidated debt.
- Regulatory Measures
Fitch continues to view Enagas’ dominant position in Spanish gas transmission and ownership of strategic gas infrastructure, including high-pressure gas pipelines, underground natural gas storage and regasification plants, as a key rating driver. Fitch assumes that pending regulatory measures to be adopted in Spain are unlikely to affect the current ratings of Enagas and opco due to the sovereign constraint.
- Change in Debt Location
Following the creation of opco due to regulatory requirements in July 2012, Enagas remains the borrower only under its Euro Commercial Paper Programme (EUR423m issued as of October 2012) and credit lines (EUR836m drawn as of October 2012). Enagas’ liabilities are not guaranteed by the opco, but it maintains most of the liquidity.
Long term debt and regulated assets have been or are being transferred to opco or are issued by Enagas Financiaciones, S.A.U. (finco), including the EUR2bn EMTN Programme, which is guaranteed on a joint and several basis by Enagas and opco.
- Subordinated Unpaid Interests of the EMTN Notes
Fitch considers that the finco’s noteholders could have a slight disadvantage from a recovery prospects perspective, as under Spanish law, interest on the notes accrued but unpaid as at the commencement of any insolvency proceeding relating to the issuer will constitute subordinated obligations of the issuer ranking below its other unsecured and unsubordinated obligations. However, finco currently has no obligations other than the notes.
- Senior Unsecured Notch Uplift
The additional notch above the IDR applied to the debt instruments of utilities with a large portion of regulated income, reflecting higher anticipated recoveries in the event of default, is not applied if that uplift would exceed the sovereign’s foreign currency ratings. Instead, the senior unsecured debt rating is re-aligned with the utilities’ IDR. Fitch believes that the traditionally higher rates of recovery for utilities’ debt are less predictable in a distressed sovereign environment than in the case of an idiosyncratic default of a single utility.
Positive: The current Rating Outlook is Negative. As a result, Fitch’s sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. Future developments that may nonetheless potentially lead to a positive rating action include:
- A positive rating action on Spain would lead to a positive rating action for Enagas, opco and finco’s guaranteed notes, assuming their current unconstrained profile remains is unchanged.
Negative: Future developments that could lead to negative rating action include:
- A negative rating action on the sovereign would likely be replicated for the ratings of Enagas, opco and finco’s guaranteed notes, given the limited geographical diversification of the group.
- Should the sovereign rating remain unchanged, an increase in Enagas’ group funds from operations (FFO) net adjusted leverage to around 5.5x or above, on a sustained basis, would lead to a downgrade of its Long-term IDR. Opco’s and finco’s guaranteed notes rating would remain at the current level if opco’s FFO net adjusted leverage remains below 5.0x (taking into account guaranteed debt).
Enagas’ liquidity position, with EUR1.8bn of cash and cash equivalents and EUR785m of undrawn credit facilities as of October 2012, covers debt maturities for the next 18 months. However, Fitch notes that a significant portion of the undrawn credit facilities is held with Spanish banking entities. Although the liquidity is largely held by Enagas S.A., it can be provided to opco without limitations. Fitch anticipates Enagas’ free cash flow to be neutral (having been historically negative) as the company reduces its growth capex and maintains dividend payout at 70%.
Long-term IDR affirmed at ‘A-', Negative Outlook
Short- term IDR and EUR1bn ECP affirmed at ‘F2’
Senior unsecured rating of ‘A-’ withdrawn
EUR500m notes due 2015 and JPY20bn notes due 2039, affirmed at ‘A-’ and transferred to Enagas Transporte, S.A.U.
Enagas Financiaciones, S.A.U.
Final senior unsecured rating on EUR750m notes issued under EUR2bn EMTN Programme guaranteed by Enagas, S.A. and Enagas Transporte, S.A.U. assigned at ‘A-’
Enagas Transporte, S.A.U.
Long-term IDR assigned at ‘A-', Negative Outlook
Senior unsecured rating assigned at ‘A-'