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TEXT-Fitch assigns NGG Finance's proposed hybrid notes 'BBB-(EXP)' rating
February 28, 2013 / 5:15 PM / 4 years ago

TEXT-Fitch assigns NGG Finance's proposed hybrid notes 'BBB-(EXP)' rating

Feb 28 - Fitch Ratings has assigned NGG Finance Plc's proposed subordinated
hybrid securities (notes) an expected rating of 'BBB-(EXP)'. The notes qualify
for 50% equity credit and will have a maturity of at least 60 years. The notes
will be guaranteed on a subordinated basis by National Grid Plc (NG,
'BBB'/Stable) and the assignment of the final rating remains contingent upon the
receipt of final documents conforming to information already received.

The ratings reflect the highly subordinated nature of the notes, considered to
have lower recovery prospects in a liquidation or bankruptcy scenario. The
equity credit reflects the structural equity-like characteristics of the
instruments including subordination, maturity in excess of five years and
deferrable interest coupon payments. Equity credit is limited to 50% given the
cumulative interest coupon, a feature considered more debt-like in nature.

The notes' rating and assignment of equity credit are based on Fitch's hybrid
methodology, published in December 2012 (see "Treatment and Notching of Hybrids
in Nonfinancial Corporate and REIT Credit Analysis" on


Deep Subordination and Generic Sector Uplift
The rating assigned to the proposed notes is two notches down from NG's 'BBB'
Long-term Issuer Default Rating (IDR) which reflects the notes' increased loss
severity and heightened risk of non-performance relative to the senior
obligations, and is then notched up by one notch to reflect the above average
recovery prospects of regulated utilities, in accordance with the agency's
criteria mentioned above.

Equity Treatment Given Equity-Like Features
The notes qualify for 50% equity credit as they meet Fitch's criteria with
regards to subordination, remaining effective maturity of at least five years,
full discretion to defer coupons for at least five years and limited events of

Cumulative Coupon Limits Equity Treatment
The notes are subordinated and rank senior only to National Grid's ordinary
share capital. There is also no look back provision in the proposed
documentation, which gives the issuer full discretion to defer ongoing coupon
payments on the notes. Deferrals of coupon payments are cumulative which results
in 50% equity treatment and 50% debt treatment of the hybrid notes by Fitch. The
company will not be obliged to make deferred interest payments upon a dividend
payment. Instead, the company shall be prohibited from paying a dividend or
repurchasing any ordinary shares until all outstanding deferred interest is paid
in full, under a stopper.

Effective Maturity Dates
Whilst the notes are long-dated, Fitch deems the effective, remaining maturity,
according to Fitch's hybrid criteria, as the second step-up date, which will
occur 20 years following the first call date, which is expected to be a minimum
of 5 years from the issue date. From this date, the coupon step-up will increase
to 100bps cumulative from 25bps (which is within Fitch's step-up threshold of
100bps), but the issuer is expected to no longer be subject to replacement
language disclosing the company's intent to redeem the notes at their call date
with the proceeds of a like instrument or with equity. According to Fitch's
criteria, the equity credit of 50% would change to 0% five years before the
effective remaining maturity dates.

The notes will have a swap-rate related coupon which will reset for the initial
non-call period where relevant, and the initial non-call period is expected to
be a minimum of five years from the issue date. The issuer has a call option to
redeem the notes on the first call date and any optional redemption date after


Low-Risk Regulated Investments
NG's ratings are driven by its stable, regulated revenues. NG is a holding
company with investments in UK and US utility businesses. UK subsidiaries,
including National Grid Gas Plc (NGG, 'A-'/Stable) and National Grid Electricity
Transmission Plc (NGET, 'A-'/Stable), provided about 62% of total operating
profit in the financial year to March 2012 (FY12).

Geographic Diversity Lowers Risk
NG's subsidiaries own and operate diverse utility businesses across a number of
geographies. Fitch believes the diversity of businesses across multiple
regulatory jurisdictions would limit the impact of a sudden adverse change in
the regulatory framework by a single or multiple regulators on cash flow at a
given time.

UK's New Price-Control
The new regulatory frameworks in the UK (RIIO-T1 and RIIO-GD1) place pressure on
the cash flow profiles of NGG and NGET through high capital spending, tighter
incentives on the delivery of regulatory outputs, tougher unit cost efficiency
challenges and a lower weighted average cost of capital. This in turn affects
upstream cash distributions from NG's UK subsidiaries to fund cash flow
requirements at NG, such as debt maturities and dividend payments.

Stable US Regulatory Framework
NG is carrying out new regulatory filings under its US businesses in an effort
to bring achieved returns in line with allowed returns. US regulators are
increasingly challenging returns on equity as well as cost allocations. The
latest agreed filing, Narragansett Gas and Electric, has been allowed a 9.5%
return on equity from February 2013.

High Capital Spending Programme
A shifting focus to low-carbon energy infrastructure in the UK requires
investment on transmitting energy from remote areas to load centres, maintaining
the safety and reliability of the system while replacing and maintaining the
existing ageing infrastructure. Total investment is forecast to be GBP35bn to
2021, pressuring ratings should liquidity and the headroom under the UK
subsidiary capital structures prove insufficient.


At 31 December 2012 NG had GBP2.2bn in available cash and a USD850m syndicated
facility expiring in November 2015. In addition, NG refinanced GBP860m
equivalent of bilateral revolving facilities out to 2017. Liquidity should be
sufficient for the company out to FY14, following GBP3bn of total debt issuance
since March 2012.


Positive: Future developments that could lead to positive rating actions
A positive rating action on the rated UK operating companies and improvement in
NG's consolidated funds from operations (FFO) based interest coverage to 4.5x or
higher or reduction in FFO based consolidated net leverage to below 4.5x, on a
sustainable basis.

Negative: Future developments that could lead to negative rating action include:
Decline in consolidated FFO based interest coverage to below 4.0x and increase
in FFO based consolidated net leverage to 5.5x or higher on a sustainable basis
and/or negative rating action on the rated UK operating companies.

Additional information is available on For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
the secondary.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Corporate Rating Methodology', dated 08 August 2012, and
'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' dated 12
December 2012, are available at

Applicable Criteria and Related Research
Corporate Rating Methodology
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit

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