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June 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Enel SpA’s (rated ‘BBB+’ with a Negative Outlook by Fitch) proposed multicurrency subordinated fixed-reset notes an expected rating of ‘BBB-(EXP)'. The proposed notes qualify for 50% equity credit. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation. A full list of Enel’s ratings follows at the end of this release.
The rating for the proposed capital securities reflects 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 rating of the notes and assignment of equity credit are based on Fitch’s hybrid methodology, published on 13 December 2012 (Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, available on www.fitchratings.com).
Fitch understands Enel intends to issue three tranches in different currencies and with different call and step-up dates.
KEY RATING DRIVERS FOR THE NOTES’ RATING
Ratings Reflect Deep Subordination
The notes have been notched down by two notches from Enel’s Long-term IDR (BBB+/Negative) given their deep subordination and consequently, the lower recovery prospects in a liquidation or bankruptcy scenario relative to the senior obligations. The notes only rank senior to the claims of equity shareholders.
Equity Treatment Given Equity-Like Features
The proposed securities qualify for 50% equity credit as they meet Fitch’s criteria with regards to deep subordination, permanence and optional interest deferability.
Effective Maturity Date is 2039, 2040 and 2043
Although the nominal tenor is at least 60 years Fitch deems the effective maturity as 2039, 2040 or 2043 (depending on the tranche), in accordance with the agency’s hybrid criteria. From this date, the coupon step-up is within Fitch’s aggregate threshold rate of 100bps, but the issuer will no longer be subject to replacement language, which discloses the company’s intent to redeem the instrument at its call date with the proceeds of a similar instrument or with equity. According to Fitch’s criteria, the equity credit of 50% would change to 0% five years before the effective maturity date. The issuer has the option to redeem the notes on the first call date (2019, 2020 or 2023 depending on the tranche) and every five years thereafter.
Cumulative Coupon Limits Equity Treatment
The interest coupon deferrals 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 as 100% interest. The company will be obliged to make a mandatory settlement of deferred interest payments under certain circumstances, including the payment of a dividend. This is a feature similar to debt-like securities and provides the company with reduced financial flexibility.
The Negative Outlook reflects the weakness of the electricity market fundamentals in Spain and Italy, Enel’s largest markets, and the persisting regulatory risk in Spain. Lower electricity demand, increasing renewable capacity, uncompetitive gas supply contracts and weak CO2 prices continue to depress power prices in Europe and affect profitability margins of power generators.
Regulatory Environment Remains Weak
Despite the intention of the Spanish government to eliminate the tariff deficit (TD) issue and revert to a fully cost-reflective system, Fitch believes that the regulatory environment in Spain remains weak. Regulatory measures introduced in 2012 including the new tax scheme on generation might not be sufficient to eradicate the TD problem and therefore expect new actions from the Government to end the generation of deficit in the system that might put further pressure on utilities.
Enel’s rating is not currently constrained by the rating of Italy (or Spain). However, the ability to monetise the Spanish deficits through the securitisation of TD notes that benefit from a Spanish state guarantee remains highly correlated to Spanish sovereign risk.
Future developments that could lead to a positive revision of the Outlook include: 1) funds from operations (FFO) net leverage below 4.5x and FFO interest coverage above 4.0x on a sustained basis; 2) a recovery in electricity demand and reduction of overcapacity in Italy and Spain; 3) an improvement in sovereign creditworthiness contributing to a faster monetisation of the historical TD; 4) comprehensive reform of the Spanish electricity sector supporting long-term investment returns.
Developments that could lead to a negative rating action include: 1) FFO net adjusted leverage above 4.5x and FFO interest coverage below 4.0x on a sustained basis; 2) a deterioration in the Italian/Spanish sovereign rating risk to a point that it would trigger an automatic downgrade; 3) a deterioration of the Italian/Spanish economic outlook requiring a downward adjustment of earnings expectations; 4) worsening of market access increasing the cost of debt beyond coverage ratios guidelines.
Enel group’s available liquidity covers maturities up to 2015. Cash and available committed credit lines as of end of March 2013 amounted to EUR9.1bn and EUR14.1bn, respectively. Committed lines include EUR14bn expiring after 2014. According to Fitch’s forecasts, Enel group is expected to remain free cash flow positive over 2013 - 2014.
Should the proposed hybrid bond issue of EUR5.0bn be successful, pro forma forecast FFO adjusted net leverage ratio would decrease by around 0.2x (on average between 2013 and 2016), while FFO interest cover may be slightly weaker due to cost of debt.
Fitch Rates Enel SpA as follows:
--Long-term IDR ‘BBB+'; Outlook Negative;
--Short-term IDR ‘F2’;
--Senior unsecured rating ‘BBB+';
--Subordinated capital securities’ expected rating ‘BBB-(EXP)’ for proposed securities.