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Jan 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Enel SpA’s (BBB+/Rating Watch Negative; RWN) multicurrency notes a ‘BBB-’ rating on RWN. The notes qualify for 50% equity credit. A list of Enel’s ratings is at the end of this release.
The hybrid notes are deeply subordinated and rank senior only to Enel’s share capital, while coupon payments can be deferred at the option of the issuer. These features are reflected in the ‘BBB-'/RWN rating which is two notches lower than Enel’s ‘BBB+'/RWN Long-term Issuer Default Rating (IDR) reflecting the notes’ increased loss severity and heightened risk of non-performance relative to the senior obligations.
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. This approach is in accordance with Fitch’s hybrid methodology, ‘Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis’, dated 23 December 2013 available on www.fitchratings.com.
The combined amount of the issue is approximately EUR1.6bn and is split among two tranches as follows:
EUR1bn at 5% coupon until the first reset date, with a six-year first call date (2020) and final maturity date of 2075 GBP500m at 6.625% coupon until the first reset date, with a seven year and eight months first call date (2021) and final maturity date of 2076. The effective remaining maturity, according to Fitch’s hybrid criteria is January 2040 and September 2041 for the EUR and GBP tranches, respectively. From these dates the coupon step-up is set to increase to 100bps from 25bps (which is within Fitch’s step up threshold of 100bps), but the issuer will no longer be subject to the replacement language disclosing the company’s intent to redeem the instrument at its call date with the proceed of a similar instrument or with equity. Fitch will remove the equity credit of the notes for its rating forecasts five years before the effective maturity date related to the agency’s criteria is reached (i.e. equity credit will fall away for above detailed tranches in 2035 and 2036).
There is no look back provision in the notes’ documentation, which gives the issuer full discretion to defer ongoing coupon payments on the notes. Deferrals of coupons are cumulative, which results in 50% equity treatment and 50% debt treatment of the hybrid notes by Fitch. Despite the 50% equity treatment, we treat coupon payments as 100% interest. The company will be obliged to make a mandatory settlement of deferred interest payments under certain circumstances, including the declaration or a payment of a dividend.
Regulation and Weak Fundamentals
Regulatory risk and weak market fundamentals in Italy and Spain, Enel S.p.A’s second-largest market in Europe, will be Enel’s main rating catalysts for 2014. The ability to reduce debt through disposals will also be a key driver for the improvement in credit metrics.
The RWN on Enel followed the announcement by the Spanish government in July 2013 of further regulatory measures to resolve the excess cost or tariff deficit (TD) of the Spanish electricity system. This affects the cash-flow contribution from Endesa’s (BBB+/RWN/F2) Iberian operation, representing 24% of Enel’s group consolidated EBITDA for 2012.
Weak Spanish Regulatory Environment
Given the lengthy and highly political nature of Spanish energy reform and structural drivers for the TD, Fitch believes that regulatory risk remains for utilities operating in the country until the system is rebalanced and the governance of the sector possibly improves. Some legal tail-risk remains as the new measures may be tested in the courts. The outstanding system TD at end-2013, although significantly reduced, was still EUR3.6bn.
Weak Electricity Market Outlooks
In Italy and Spain overcapacity and sluggish demand are likely to persist in 2014 on the back of fragile economic recovery prospects. This is only partially compensated by Enel’s continued growth in Latam markets, and leads to an overall decline in Enel’s EBITDA to EUR12.2bn at 9M13 from EUR12.8bn at 9M12 (-4.3%).
In 2013 Enel realised proceeds from disposals for EUR1.6bn, including EUR1.3bn from the disposal of its stake in SeverEnergia. The impact of earnings dilution from disposals is negligible. Enel is targeting a total of EUR6bn of disposals in order to reduce leverage. Fitch forecasts group’s funds from operations (FFO) net leverage as of YE13 at 4.1x, and declining to below 4x by YE14 should Enel successfully proceeds with its disposals plan.
Positive: Future developments that may potentially lead to a resolution of the RWN and affirmation of the ratings include:
- FFO adjusted net leverage substantially below 4.5x and FFO interest coverage above 4.0x on a sustained basis including the impact of new regulatory measures in Spain.
Negative: Future developments that may potentially lead to a downgrade include:
- An increase of FFO adjusted net leverage above 4.5x and FFO interest coverage below 4.0x on a sustained basis as a result of the approved measures.
- Deterioration of the operating environment or further government measures substantially reducing cash flows.
Enel group’s available liquidity covers maturities up to 2017. Cash and available committed credit lines as of end-September 2013 amounted to EUR8.2bn and EUR14.9bn, respectively. According to Fitch’s forecasts, Enel group should remain free cash flow positive over 2013-2014. Following the recent hybrid bond issues, pro forma forecast FFO adjusted net leverage ratio should marginally improve, while FFO interest cover may be slightly weaker due to the higher average cost of debt.
Enel’s ratings are as follows:
Long-term IDR ‘BBB+'/RWN
Short-term IDR ‘F2’/RWN
Senior unsecured rating ‘BBB+'/RWN
Subordinated capital securities’ rating ‘BBB-'/RWN