(The following statement was released by the rating agency)
Jan 16 - Fitch Ratings has assigned Electricite de France (EDF, ‘A+'/Stable) proposed multicurrency reset perpetual subordinated notes an expected rating of ‘A-(EXP)'. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation.
The upcoming hybrid notes are proposed to be deeply subordinated and to rank senior only to EDF’s share capital, while coupon payments can be deferred at the option of the issuer. As a result of these features, the ‘A-(EXP)’ rating assigned to the proposed notes is two notches down from EDF’s ‘A+’ Long-term Issuer Default Rating (IDR) which reflects the notes’ increased loss severity and heightened risk of nonperformance relative to the senior obligations. This approach is in accordance with the agency’s criteria, “Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis” dated 13 December 2012 at www.fitchratings.com.
The proposed securities 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 default.
The proposed notes have no fixed maturity dates. However the effective, remaining maturity, according to Fitch’s hybrid criteria is 2040 and 2045 for the seven year and 12 year non-call EUR-denominated tranches respectively, 2043 for the USD-denominated tranche and 2046 for the GBP-denominated tranche. From these dates the coupon step-up is set to increase to 100bps from 25bps and the issuer will no longer be subject to replacement language disclosing the company’s intent to redeem the instrument at its call date with the proceeds of a similar instrument or with equity.
The issuer has a call option to redeem the notes on the first call date (in 2020 and 2025 for the seven year and 12 year non-call EUR-denominated tranches respectively, in 2023 for the USD-denominated tranche and in 2026 for the GBP-denominated tranche), when there will be a coupon step-up of 25bps (except for the non-call seven EUR tranche for which the step up will occur in year 10), and on any annual interest payment date thereafter.
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 coupon payments are cumulative. The company will be obliged to make a mandatory settlement of deferred interest payments under certain circumstances, including a declaration or payment of a dividend.
Key Rating Drivers
EDF’s IDR reflects a strong business profile supported by a solid position in the domestic market (62% of 2011 EBITDA), and a low-cost nuclear generation portfolio balanced by a regulated distribution business, which contributes to stable and predictable cash flows. The ratings are also underpinned by EDF’s diversified international business.
Financial Profile Moderately Stretched
EDF has no financial headroom at the current rating level. The agreement reached with the government about the resolution of the contribution au service public d‘electricite (CSPE) deficit, intended to be covered by a tax included in the electricity tariff on all customers in France, published on 14 January 2013 is broadly in line with Fitch’s assumptions of gradual recovery.
Substantial Capex Programme
Although EDF announced a review of its capex plans in July 2012 to be disclosed at its full year results in February 2013, Fitch expects a further increase of the company’s capex programme
with the recent announcement of the rise in costs for the European Pressurized Reactor (EPR) under construction at Flamanville by an additional EUR2bn to EUR8.5bn. The proposed hybrid issue would mitigate the pressure on leverage ratios, projected by Fitch to be around 3.0x for 2012-13 (net adjusted debt to funds from operation).
The price at which EDF’s competitors have regulated access to electricity from EDF’s nuclear fleet (ARENH), has yet to be determined for 2013 and could prove to be a negative credit factor if set significantly lower than expected by EDF. EDF currently benefits from an ARENH price of EUR42 per megawatt hour (January 2012 to January 2013).
Further Business Diversification
Fitch views EDF’s full control of EDF Energies Nouvelles as credit positive. EDF’s full control of Edison Spa (‘BB’/Positive) will contribute to enhancing EDF’s diversification into the gas sector.
EDF’s liquidity at end-Q312 included cash and cash equivalents of EUR5.4bn, short-term liquid investments of EUR11.8bn and committed undrawn facilities of EUR9.1bn, against short-term maturities of EUR14.7bn. EDF’s pro forma average debt maturity as of end-Q312 was 8.7 years, following the EUR2bn 10.5-year bond issue in September 2012. Fitch expects the company to generate negative free cash flow (FCF) over 2012-2013.
Positive: Future developments that could lead to a positive rating action include:
- Funds from operations (FFO) net leverage below 2.0x on a sustained basis.
- Contribution of regulated EBITDA increasing to 50% of total EBITDA.
Negative: Future developments that could lead to negative rating action include:
- FFO net leverage above 3.0x on a sustained basis, due to for example further capex overspent, significant M&A or increased shareholder compensation adverse regulatory changes in relation to tariff reform in France and/or the elimination of the CSPE deficit recovery;
- Negative developments regarding legislation on nuclear assets.