(The following statement was released by the rating agency)
-- We lowered our sovereign ratings on Spain to 'BBB-/A-3' from
'BBB+/A-2' and assigned a negative outlook to the long-term rating on Oct. 10,
-- We believe Italian electric utility Enel has moderate country risk
exposure to Spain through its 92% stake in Spanish electric utility Endesa, as
Spain is one its main European markets.
-- We are revising the outlooks on Enel and Endesa
to negative from stable and affirming our 'BBB+/A-2' long-and short-term
-- The negative outlooks reflect that on Spain.
On Oct. 15, 2012, Standard & Poor's Ratings Services revised its outlooks on
Italy-based integrated utility Enel Spa and its Spanish subsidiary Endesa
S.A., to negative from stable. At the same time, we affirmed our 'BBB+/A-2'
long- and short-term corporate credit ratings.
The outlook revision follows our lowering of the long- and short-term
sovereign ratings on the Kingdom of Spain to 'BBB-/A-3' from 'BBB+/A-2' on
Oct. 10, 2012, and the assignment of a negative outlook (see "Spain Ratings
Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook
Negative," published on Oct. 10, 2012, on RatingsDirect on the Global Credit
Portal). We assess Enel as having "moderate" exposure to Spain, as our
criteria define the term, through its subsidiary Endesa, which represents
slightly more than 28% of Enel's consolidated revenues and 22% of its EBITDA.
We also believe that the continuing deterioration in economic conditions in
the Spanish and Italian markets, which together represent about 80% of Enel's
consolidated revenues, will constrain the group's business risk profile. This
could pressure Enel's ability to reach and maintain credit ratios commensurate
with our 'BBB+' rating.
According to our criteria for rating an entity in the eurozone (European
Economic and Monetary Union) above the sovereign, there is a maximum possible
rating differential of three notches between the rating on Enel and the
sovereign for moderate exposure to an investment-grade sovereign. Under the
same criteria, if we lower the sovereign rating of Spain to speculative grade,
we would allow the rating on Enel to exceed the sovereign rating by a maximum
of two notches.
Our assessment of Enel's stand-alone credit profile (SACP) at 'bbb+' continues
to reflect our view of the group's "strong" business risk profile and
"significant" financial risk profile. In light of the challenging market
conditions we see a ratio of adjusted funds from operations (FFO) to debt at
20% as commensurate with our rating. Under our base-case scenario, Enel should
move closer to this level in 2013, but we see a risk of underperformance
linked to adverse economic conditions that could, all other things being
equal, limit Enel's capacity to generate positive free cash flow after capital
expenditure (capex) and dividends. To offset what we view as an increased risk
of Enel's' profitability margins falling, mainly linked to the electricity
market's structural overcapacity, we anticipate that the group will implement
additional measures to strengthen its credit metrics on top of the already
announced revision of its dividend policy and cost rationalization
initiatives. In our opinion, the potential to achieve stronger credit metrics
in the near term will depend on the group's capacity to scale down its capex
In our opinion, Enel's subsidiary Endesa continues to receive sufficient
support from its parent, and for this reason we believe Endesa's 'BBB+'
long-term rating continues to be determined by its higher rated parent's SACP,
which we assess at 'bbb+'. Specifically, we expect Enel to support Endesa in
addressing increasing funding pressure arising from what we understand will be
a temporary suspension in 2012 of the tariff deficit receivables
securitization scheme in Spain. As of June 30, 2012, Endesa reported tariff
deficit receivables as high as EUR4.9 billion, which, failed to generate the
liquidity the group had previously expected.
The short-term corporate credit rating is 'A-2' and largely reflects the
long-term corporate credit rating and our view of Enel's "adequate" liquidity
profile under our criteria. Projected sources of liquidity exceed projected
uses by more than 1.2x over the next 12 months. This is underpinned by:
-- Access to unrestricted short-term cash and short-term marketable
securities of about EUR8.9 billion as of Jun. 30, 2012;
-- A total of EUR12.4 billion in undrawn committed credit lines maturing in
more than 12 months; and
-- Our forecast that Enel will generate average adjusted FFO of about
EUR10.5 billion over the next 12 months.
This compares with our forecast that over the next 12 months, Enel faces:
-- About EUR7 billion in capex.
-- Dividend payments of EUR2.0 billion.
-- About EUR10.8 billion in short-term debt maturing over the 12 months
from June. 30, 2012. About 50% of these maturities include commercial paper
(CP) and short-term facilities that the group expects to roll over, as it has
done in the past.
We also note that Enel will cash in EUR286 million in from the sale of Endesa
Ireland announced in October 2012 and has issued EUR3.3 billion in bonds between
September and October 2012.
In our opinion, debt maturities remain high and we believe that liquidity will
continue to require tight management, taking into account the group's high
leverage and reliance on short-term credit lines and CP. We acknowledge,
however, Enel's proven access to capital markets and its proactive liquidity
Debt issuance under the framework of Enel's global medium-term note program
(MTN) and Endesa's MTN program is subject to cross-default and negative pledge
clauses, but does not feature financial covenants. Finally, bank loans granted
to some of Endesa's subsidiaries in Spain do not contain cross-default clauses
regarding the debt of subsidiaries in Latin America.
The negative outlooks on Enel and Endesa reflect the negative outlook on Spain
and our view of increasing country risk in Enel's key domestic markets of
Spain and Italy that together represent over 80% of the group's revenues.
We might consider a negative rating action if we came to believe the group
could struggle to achieve and maintain an adjusted FFO to debt of about 20%.
This might come from lower than projected profitability of Spanish and Italian
operations, or any government actions like fiscal transfers or tariff freezes
that could impair the power utilities' cash flows in those markets. We might
also consider a negative rating action if Enel departed from its more
conservative financial strategy or we observed a diminished capacity to
generate free cash flow after capex and dividends, which we see as a necessary
condition for rating stability.
In accordance with our rating methodology for government-related entities
(GREs) and nonsovereign entities in the eurozone, a further downgrade of Spain
by one notch would also trigger a lowering of Enel's rating by one notch. This
is because under our criteria there is a maximum two-notch rating differential
between the ratings on Enel and those on Spain, since we assess Enel as having
"moderate" risk exposure to Spanish country risk.
A downgrade of the Republic of Italy (BBB+/Negative/A-2) by more than one
notch could cause us to lower the ratings on Enel. This is because a
significant part of Enel's earnings is regulated and originates domestically.
Italy directly and indirectly owns 31% of Enel and the group is partly exposed
to Italian bank counterparties. However, in the event of a downgrade of Italy,
we would evaluate whether the sovereign's creditworthiness fully constrained
that of Enel. If we assessed Enel's SACP as higher than the foreign currency
rating of Italy, this could result in a one- to two-notch differential between
the ratings on Enel and the sovereign.
In our view, the rating on Endesa will remain linked to Enel's SACP as long as
we believe that it will continue to benefit from full and unconditional
support from its parent. If we further lower the sovereign rating on Spain,
and if as a result, we see that is weighing on incentives for Enel to extend
support to Endesa, we could lower the rating on Endesa and delink it from that
Rating stability depends on the group sustaining credit metrics commensurate
with the ratings, namely adjusted FFO-to-debt of 20%. This could happen as a
result of an improved macroeconomic outlook for Italy and Spain, a recovery in
Spanish and Italian generation spreads.
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios and Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Rating Government-Related Entities: Methodology And Assumptions, Dec.
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For
Corporate And Sovereign Issuers, May 15, 2012
-- Standard & Poor's Ratings Definitions, June 22, 2012
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Ratings Affirmed; CreditWatch/Outlook Action
Corporate Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2
Senior Unsecured BBB+
Enel Finance International N.V.(4)
Senior Unsecured BBB+
Commercial Paper A-2
Enel Investment Holding B.V.(4)
Senior Unsecured BBB+
Endesa Capital Finance LLC*
Preferred Stock BBB-
International Endesa B.V.*
Senior Unsecured BBB+
Commercial Paper A-2
*Guaranteed by Endesa S.A.
(4)Guaranteed by Enel SpA.
(Caryn Trokie, New York Ratings Unit)