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TEXT-S&P cuts Iberdrola rating to 'BBB', outlook is stable
November 28, 2012 / 5:11 PM / 5 years ago

TEXT-S&P cuts Iberdrola rating to 'BBB', outlook is stable

Overview
     -- Despite Iberdrola's strategic focus on debt reduction, we believe that 
the group's improvement in credit ratios could be constrained by potential 
delays in tariff deficit securitization and the difficult macroeconomic and 
business environment in its key markets. 
     -- We are therefore lowering our corporate credit rating on Iberdrola to 
'BBB', and affirming our short-term rating at 'A-2'.
     -- We consider that Iberdrola has taken actions to reduce its exposure to 
Spanish country risk, which we now see as "moderate".
     -- The stable outlook reflects our expectation that Iberdrola will 
maintain ratios in line with the rating. Furthermore, if we downgrade Spain by 
one notch, the rating on Iberdrola would not be affected, given our view of 
its "moderate" country risk exposure. 

Rating Action
On Nov. 28, 2012 Standard & Poor's Ratings Services lowered its long-term 
corporate credit and senior unsecured debt rating on Spain-based utility 
Iberdrola S.A., and its subsidiaries Iberdrola USA and Iberdrola
Renewables Holdings Inc., to 'BBB' from 'BBB+'. We also lowered the long-term
CaVal (Mexico) national scale issue rating on Iberdrola Finanzas S.A.U. to MxAA+
from MxAAA. 

At the same time, we affirmed our 'A-2' short-term corporate credit ratings on 
Iberdrola and Iberdrola USA. The outlook is stable.

Rationale
The downgrade reflects our view that, despite its strong emphasis on improving 
credit quality, Iberdrola's strategic plan for 2012-2014 could fail to improve 
credit ratios to levels commensurate with the 'BBB+' rating, including 
Standard & Poor's-adjusted funds from operations (FFO) to debt of more than 
20%. We believe that management is committed to reducing debt by EUR6 billion by
2014 through a combination of lower capital investments, asset disposals, 
tariff deficit securitization, and positive free cash flows in all businesses. 
Nevertheless, our projections of flat EBITDA over 2012-2014 due to the tough 
fiscal and economic environment in Spain, as well as potential delays in the 
receipt of EUR3.0 billion of past tariff deficit receivables, lead us to 
anticipate that Iberdrola will sustain adjusted FFO to debt of about 18%.

Due to the ongoing erosion in both revenues and operating income from Spain, 
we believe that contributions from this jurisdiction will slightly exceed 40% 
over the near-to-medium term. This, combined with our assessment of the 
utility sector's "high" sensitivity to country risk, would generally lead us 
to assess Iberdrola's country risk exposure as "high". However, we view 
Iberdrola's exposure as "moderate" because the group effectively mitigates its 
exposure to Spanish country risk by its:

     -- High geographical diversification. A significant share of stable 
earnings is generated out of its majority-regulated U.K. operations, which 
have currently low external leverage, and its regulated U.S. activities. We 
believe that these assets remain financeable and could fully satisfy 
Iberdrola's refinancing requirements in the medium term, even if the crisis in 
Spain becomes more severe.
     -- Declining share of investments earmarked to the Spanish domestic 
market, which amount to less than 20% of the strategic plan's investment 
budget;
     -- Strategic emphasis on strong free cash flow generation in all 
businesses, including the Spanish operations;
     -- Strong and uninterrupted access to the global bank and capital funding 
markets; and
     -- Strong liquidity on the back of cash balances and available credit 
facilities, benefiting from relatively low reliance on Spanish banks.

As a result, we assess Iberdrola's country risk as "moderate." Nevertheless, 
we could revise our assessment of Iberdrola's "moderate" country risk exposure 
if the earnings and operating income contribution from Spain does not decrease 
over the medium term or if we observe anything else that suggests that 
Iberdrola is being constrained by its Spanish domicile. This could include 
restricted access to funding or any ad hoc fiscal transfer measures 
implemented by the Spanish government.

Given our assessment of "moderate" exposure to country risk, there is a 
maximum possible rating differential of three notches between the ratings on 
Iberdrola and those on its related investment-grade sovereign. Under the same 
criteria, in a theoretical scenario where we lower the sovereign rating to a 
speculative-grade level, we would allow the rating on Iberdrola to exceed the 
sovereign rating by a maximum of two notches. 

We continue to assess Iberdrola's financial risk profile as "significant," 
based on the group's relatively high leverage and credit metrics, which are 
below our rating guidelines. In our base-case scenario, we anticipate that 
Iberdrola will generate flat EBITDA in 2012-2014 as the international business 
offsets the reduction of profits from Spain due to the impact of regulatory 
reform. Factoring in the announced asset disposal plan, we project the balance 
sheet deleverage will result in credit ratios of adjusted FFO to debt of about 
18% over the near term. If the Spanish Treasury securitizes the past tariff 
deficit, we see an upside possibility that credit ratios will improve to 20%. 
However, we are cautious to include potential proceeds of tariff deficit 
securitization as they are dependent on credit market conditions. Downside to 
our forecasts on the cash flow side could arise from weaker power market 
fundamentals in Spain and the U.K., increased political risk, and/or a more 
adverse effect of the planned electricity market reform in Spain. 

A number of factors continue to underpin our assessment of Iberdrola's 
"strong" business risk profile. Most importantly, the group benefits from cash 
flow stability of about 70% of group EBITDA (at financial year-end Dec. 31, 
2011) from regulated and quasi-regulated renewable operations. Furthermore, 
the group benefits from significant scale and geographic diversity from its 
vertically integrated utility operations in the U.K., the U.S., and Latin 
America. 

Offsetting these strengths are the challenging macroeconomic, fiscal, and 
business environment in Spain, which heightens regulatory risk, and leads to 
intensifying pressure on the profitability of Iberdrola's domestic operations 
in both the liberalized and regulated markets. 

Liquidity
The short-term corporate credit rating on Iberdrola is 'A-2', and reflects the 
long-term corporate credit rating and our view of Iberdrola's "strong" 
liquidity profile under our criteria. Over the next 12-24 months, we forecast 
that liquidity sources--mainly comprising operating cash flow and available 
bank lines--will cover projected uses--comprising capital expenditure, debt 
maturities, and dividends--by at least 1.5x and 1.0x, respectively. Our 
assessment of the group's liquidity is underpinned by:

     -- Iberdrola's access to unrestricted short-term cash and short-term 
marketable securities of about EUR2.5 billion as of Sept. 30, 2012; 
     -- A total of about EUR7 billion in undrawn committed credit lines with 
maturities longer than 12 months; and
     -- Our forecast that Iberdrola will generate adjusted FFO of about EUR5.7 
billion in 2012.

This compares with our forecast that, over the next 12 months, Iberdrola faces:
     -- EUR3.5 billion in capex under our base-case scenario; 
     -- Dividend payments of about EUR1 billion (part of which could be non-cash
through a scrip dividend); and
     -- About EUR3.8 billion in short-term debt maturing over the next 12 
months. 

About 40% of these maturities include commercial paper and short-term 
facilities that the group expects to roll over as it has done in the past. 
However, this depends on the strength of the Spanish banking system and its 
ability to support such a roll-over of short-term debt. 

Further supporting our opinion of Iberdrola's "strong" liquidity position is 
the group's ability to absorb high-impact, low-probability events and maintain 
a limited need for refinancing. Additional supports are the group's 
flexibility to reduce capital spending or sell assets; its sound bank 
relationships with a diversified pool of counterparties; its solid standing in 
credit markets; and its generally prudent risk management.

Outlook
The stable outlook reflects our expectation that Iberdrola will achieve and 
sustain adjusted FFO to debt of about 18%. It also reflects the fact that, 
given our assessment of Iberdrola's "moderate" country risk exposure, if we 
downgrade Spain by one notch, the rating on Iberdrola would not be affected, 
all else being the same. That said, in the event of a sovereign downgrade, we 
will review our assessment of country risk exposure. We could reassess our 
opinion of Iberdrola's country risk exposure if the earnings and operating 
income contribution from Spain does not decrease over the medium term or if we 
observe anything else to suggest that Iberdrola is being constrained by its 
Spanish domicile. 

We would likely lower the rating if we consider that Iberdrola could struggle 
to achieve and maintain adjusted FFO to debt of about 18%. This could occur if 
weaker conditions than we forecast in the group's key markets, Spain in 
particular, weigh on its profitability. In addition, a potential increase in 
political risk, for example, due to government policies that aim to extract 
cash from power utilities in Spain, could also prevent Iberdrola from 
achieving the guideline ratio. 

In our view, rating upside could arise if Iberdrola's financial risk profile 
strengthens ahead of our current base-case scenario. We see sustainable 
adjusted FFO to debt of 20% as commensurate with a higher rating, assuming no 
further negative action on the rating of Spain and no change in the assessment 
of Iberdrola's business risk profile. This outcome could result from the 
successful completion of the Spanish tariff deficit securitization and the 
elimination of the structural deficit. It would also likely depend on 
management's continued commitment to conservative financial policies and focus 
on sustained debt reduction.
Related Criteria and Research

     -- How Regulatory Ring-Fencing Affects Our Ratings On U.K. Utilities, 
Nov. 22, 2012
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign 
Ratings: Methodology And Assumptions, June 14, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For 
Corporate And Sovereign Issuers, May 15, 2012
     -- Corporate Criteria--Parent/Subsidiary Links; General Principles; 
Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating 
Link to Parent, Oct. 28, 2004


Ratings List
Downgraded; CreditWatch/Outlook Action
                                        To                 From
Iberdrola Renewables Holdings Inc.
 Corporate Credit Rating                BBB/Stable/--      BBB+/Watch Neg/--

Iberdrola S.A.
 Senior Unsecured                       BBB                BBB+/Watch Neg

Iberdrola Finance Ireland Ltd.
 Senior Unsecured*                       BBB                BBB+/Watch Neg

Iberdrola Finanzas S.A.U.
 Senior Unsecured*                       BBB                BBB+/Watch Neg
 Senior Unsecured*                       mxAA+              mxAAA/Watch Neg

Iberdrola International B.V.
 Senior Unsecured*                       BBB                BBB+/Watch Neg

Iberdrola USA
 Senior Unsecured                       BBB                BBB+/Watch Neg

Downgraded; CreditWatch/Outlook Action; Ratings Affirmed
                                        To                 From
Iberdrola S.A.
Iberdrola USA
 Corporate Credit Rating                BBB/Stable/A-2     BBB+/Watch Neg/A-2

Ratings Affirmed

Iberdrola International B.V.
 Commercial Paper*                       A-2                

*Guaranteed by Iberdrola S.A.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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