-- U.K.-based vertically integrated utility SSE PLC is proposing to
issue junior subordinated hybrid securities.
-- We assess the new securities as having intermediate equity content, in
line with SSE's existing hybrid capital.
-- We are assigning our 'BBB' issue rating to the new securities to
reflect their subordination and optional deferability.
LONDON (Standard & Poor's) Aug. 30, 2012--Standard & Poor's Ratings Services
said today that it assigned its 'BBB' long-term issue rating to the perpetual,
optionally deferrable, and subordinated capital securities being issued by
U.K.-based vertically integrated utility SSE PLC (SSE; A-/Negative/A-2). The
transaction volume is subject to market conditions.
We consider the new securities to have intermediate equity content because
they meet our criteria, for a period of five years, in terms of subordination
and permanence, and are deferrable at the company's discretion.
The issuance of the new hybrid securities does not affect our assessment of
the intermediate equity content of SSE's existing subordinated hybrid capital
of GBP750 million and EUR500 million, issued in September 2010. Our
of the existing hybrid instruments as having intermediate equity content is
consistent with our criteria for determining equity content at the time those
instruments were issued. Therefore, it does not conflict with our
classification of the new securities.
We arrived at our 'BBB' issue rating on the new securities by notching down
from our 'A-' long-term corporate credit rating (CCR) on SSE. 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 SSE is
investment grade (that is, higher than 'BB+'); and
-- An additional one-notch deduction for payment flexibility to reflect
that the deferral of interest is optional and that the CCR is investment grade.
The notching of the new securities is linked to our perception of a relatively
low likelihood of deferral. Should our perception change, we may increase the
notching significantly and, in relative terms, more quickly than a revision of
In addition, in view of what we see as the intermediate equity content of the
new securities, we allocate 50% of the related payments on these securities as
a fixed charge and 50% as an equivalent of 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,
rating, or accounting events. Furthermore, SSE can redeem them for cash as of
the first call date, five years after issuance, and every five years
thereafter. If any of these events occur, the company intends, but is not
obliged, to replace the instrument. In our view, this statement of intent
mitigates SSE's ability to repurchase the notes on the open market, which we
see as unlikely in our current base-case credit scenario.
The interest to be paid on the new securities will increase by 25 basis points
in 2022 and a further 75 basis points in 2037. We consider that this
significant step-up, unmitigated by any current commitment to replace the
instrument at that time, provides an incentive for SSE to redeem the
instrument on that 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
2017, because the remaining period until its economic maturity would, by then,
be less than 20 years. However, we 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 the
instrument to be called at that point. SSE's willingness to maintain or
replace the instrument in the event of a reclassification of equity content to
minimal is underpinned by its statement of intent.
KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S DEFERABILITY
In our view, SSE's option to defer payment on the new securities is
discretionary. This means that SSE 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 will have to be settled in cash if at a
general meeting SSE's shareholders decide on the payment of a dividend, or if
SSE pays interest on, redeems, or repurchases equally ranking or junior
securities. We see this as a negative factor. That said, this condition
remains acceptable under our methodology because once the issuer has settled
the deferred amount, it can still choose to defer on the next interest payment
SSE 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 new securities (and coupons) are intended to constitute direct, unsecured,
and subordinated obligations of SSE. The new securities rank senior to common
and preferred shares and pari passu with the GBP750 million and EUR500 million
securities issued in September 2010.
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
Junior Subordinated BBB