August 2, 2012 / 4:25 AM / in 5 years

TEXT-S&P Rates Caltex Australia's Hybrid Issue 'BBB-'; On Watch Neg

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(The following was released by the rating agency)

MELBOURNE (Standard & Poor's) Aug. 2, 2012-Standard & Poor's Ratings Services today said that it had assigned its 'BBB-' long-term issue rating on Caltex Australia Ltd.'s (Caltex; BBB+/Watch Neg/A-2) proposed A$300 million hybrid capital securities issuance. At the same time, we have placed the rating on CreditWatch with negative implications.

These securities are subordinated to all current and future senior creditors of the group. Standard & Poor's has assigned the securities an "intermediate" equity credit. This means that we will treat them as 50% debt and 50% equity in our financial ratio calculations. Caltex has indicated that the proceeds will be used for general corporate purposes, including repayment of existing financial indebtedness.

A key feature of the securities includes a deferral of interest for up to five years at the company's option. Other features of the securities include: 25 years to maturity; a 25 basis point step-up in September 2017; and the issuer's right to call the securities on September 2017 and every subsequent interest payment date. There is also a limited number of additional issuer call rights linked to the occurrence of certain prescribed events, such as a change of control.

The CreditWatch on the rating on the hybrid securities is in line with that on the corporate credit rating on Caltex Australia. We placed the company on CreditWatch negative on July 26, 2012, pending funding clarity of the company's proposed supply chain restructure. We expect to resolve the CreditWatch within the next three months from July 26, 2012, after we have assessed Caltex's funding strategy, including the execution of the hybrid issuance and the specifics on dividend reduction and other financial levers. To maintain its 'BBB+' corporate credit rating, we expect Caltex's adjusted FFO-to-debt to remain well above 40% and adjusted debt-to-EBTIDA to be lower than 2x. We also expect Caltex to generate positive free operating cash flow. If Caltex were to implement sufficient financial levers to maintain its prospective credit metrics, the rating could be affirmed. The outlook could be stable or negative depending on the buffer in the ratings.

If a downgrade were to occur, we believe that it's likely to be limited to one notch for its corporate credit rating and long-term issue ratings. We expect the potential deterioration of its financial risk profile to be limited to the "intermediate" category.

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