(The following statement was released by the rating agency)
Jan 16 -
-- France-based power utility Electricite de France S.A. (EDF) is proposing to issue junior subordinated hybrid securities.
-- We assess the proposed securities as having intermediate equity content.
-- We are assigning our ‘BBB+’ issue rating to the proposed securities to reflect their subordination and optional deferability.
Standard & Poor’s Ratings Services today assigned its ‘BBB+’ long-term issue rating to the proposed perpetual, optionally deferrable, and deeply subordinated hybrid capital securities to be issued by France-based power utility Electricite de France S.A. (EDF; A+/Stable/A-1). The transaction volume is subject to market conditions. We understand that the issuer intends to place four tranches in different currencies and with different call and step-up dates.
We consider the proposed securities to have intermediate equity content until their respective first call dates because they meet our hybrid capital criteria in terms of their subordination, permanence, and optional deferability during this period.
We arrive at our ‘BBB+’ issue rating on the proposed securities by notching down from our ‘a’ stand-alone credit profile (SACP) on EDF (see “Unregulated Issuers’ Hybrid Instruments: Rating Methodology And Assessment Of Equity Content,” published on March 17, 2011).
EDF’s massive, long-term capex effort, heightened regulatory risk in France, and uncertainties regarding the monetization of the CSPE tax deficit put significant pressure on the current SACP. A downward revision of EDF’s SACP would trigger a downgrade of the proposed securities’ rating.
The two-notch differential between the issue rating and the SACP reflects our notching methodology, which calls for:
-- A one-notch deduction for subordination because the corporate credit rating (CCR) on EDF is investment-grade (that is, ‘BBB-’ or above); and
-- An additional one-notch deduction for payment flexibility to reflect the fact that the deferral of interest is optional and that the CCR is investment-grade.
The notching of the proposed securities reflects our view that there is a relatively low likelihood that EDF will defer interest. Should our view change, we may significantly increase the number of downward notches that we apply to the issue rating.
In addition, in view of what we see as the intermediate equity content of the proposed securities, we allocate 50% of the related payments on these securities as a fixed charge and 50% as equivalent to a common dividend, in line with our hybrid capital criteria. The 50% treatment (of principal and accrued interest) also applies to our adjustment of debt.
KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT‘S PERMANENCE
Although the securities are perpetual, they can be called at any time for tax, gross-up, rating, or accounting events. Furthermore, EDF can redeem them for cash as of their respective first call dates (in 2020 and 2025 for two euro tranches; 2026 for the British pound sterling tranche, and 2023 for the U.S. dollar tranche) and every interest payment date thereafter. If any of these events occur, the company intends to replace the instrument, although it is not obliged to do so.
The interest to be paid on the proposed securities will increase by 25 basis points on the first call date (except for the euro tranche which has a call date in 2020 but a first step-up date in 2023), and a further 75 basis points on the second reset date (in 2040 and 2045 for the euro tranches; 2046 for the sterling tranche, and 2043 for the U.S. dollar tranche). We consider the cumulative 100 basis points as a material step-up, which is currently unmitigated by any commitment to replace the instrument at that time. This step-up provides an incentive for EDF to redeem the instrument on first call date.
Consequently, in accordance with our criteria, we will no longer recognize the instruments as having intermediate equity content after their respective first call dates, because the remaining period until its economic maturity would, by then, be less than 20 years. However, we will classify the instrument’s equity content as intermediate until the first call date as long as we consider that the loss of the beneficial intermediate equity content treatment will not cause EDF to call the instrument at that point. EDF’s willingness to maintain or replace the instrument in the event of a reclassification of equity content to minimal is underpinned by its aforementioned statement of intent.
KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT‘S DEFERABILITY
In our view, EDF’s option to defer payment of interest on the proposed securities is discretionary. This means that EDF may elect not to pay accrued interest on an interest payment date because it has no obligation to do so. However, any outstanding deferred interest payment would have to be settled in cash if EDF declares or pays an equity dividend or interest on equal-ranking securities, or if EDF redeems or repurchases shares or equal-ranking securities. We see this as a negative factor in our assessment of equity content. That said, this condition remains acceptable under our rating methodology because once the issuer has settled the deferred amount, it can choose to defer payment on the next interest payment date.
EDF retains the option to defer coupons throughout the instrument’s life. The deferred interest on the proposed securities is cash-cumulative, and will ultimately be settled in cash.
KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT‘S SUBORDINATION
The proposed securities (and coupons) are intended to constitute direct, unsecured, and deeply subordinated obligations of EDF. The proposed securities rank junior to all unsubordinated, ordinary subordinated obligations and prets participatifs, and are only senior to common and preferred shares. As per our criteria, however, we only notch the proposed notes down by one notch, despite the deep subordination.
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Unregulated Issuers’ Hybrid Instruments: Rating Methodology And Assessment Of Equity Content, March 17, 2011
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- Electricite de France S.A., Aug. 31, 2012