(The following statement was released by the rating agency)
Jan 21 -
-- Austria-based telecom operator Telekom Austria AG is proposing to issue junior subordinated hybrid securities.
-- We assess the proposed securities as having intermediate equity content, under our criteria.
-- We are assigning our ‘BB+’ issue rating to the proposed securities to reflect their subordination and optional deferability.
Standard & Poor’s Ratings Services said today that it has assigned its ‘BB+’ long-term issue rating to the proposed, undated, optionally deferrable, and deeply subordinated hybrid capital securities to be issued by Austria-based telecom operator Telekom Austria AG (BBB/Stable/A-2). We understand that the transaction volume is subject to market conditions.
We consider the proposed securities to have intermediate equity content until their first call date in February 2018 because they meet our hybrid capital criteria in terms of their subordination, permanence, and optional deferability during this period. In addition, this assumes that the amount of issued hybrid securities will not exceed 15% of the group’s capitalization in the medium term. Under our criteria, we define capitalization as the sum of financial debt, hybrids, and book equity adjusted for goodwill and after all our other standard adjustments to debt and equity.
We arrive at our ‘BB+’ issue rating on the proposed securities by notching down from our ‘BBB’ long-term corporate credit rating (CCR) on Telekom Austria. The two-notch differential between the issue rating and the CCR reflects our notching methodology, which calls for:
-- A one-notch deduction for subordination because the CCR on Telekom Austria 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 Telekom Austria 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 interest 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 agency, accounting, or change of control events. Furthermore, Telekom Austria can redeem them for cash as of the first call date in February 2018, and every five years thereafter. If any of these events occur, the company intends to replace the instrument, although it is not obliged to do so. In our view, Telekom Austria’s statement of intent also mitigates the likelihood of open market purchases by the company, as does its financial policy which primarily aims to maintain a conservative balance sheet and an investment-grade rating of ‘BBB’ with a stable outlook. To support its credit metrics and balance sheet, the group cut the dividend per share in December 2011 by 50% to EUR0.38 for the fiscal year ended Dec. 31, 2011, and in September 2012 to EUR0.05 for the fiscal years 2012 and 2013.
The interest to be paid on the proposed securities will increase by 25 basis points in February 2023, and a further 75 basis points in February 2038. 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 Telekom Austria to redeem the instrument on the February 2038 call date, in our view.
Consequently, in accordance with our criteria, we will no longer recognize the instrument as having intermediate equity content after the first call date in February 2018, 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 believe that the loss of the beneficial intermediate equity content treatment will not cause Telekom Austria to call the instrument at that point. Telekom Austria’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, Telekom Austria’s option to defer payment of interest on the proposed securities is discretionary. This means that the company 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 Telekom Austria declares or pays an equity dividend or interest on equal-ranking securities, and/or if Telekom Austria or any of its subsidiaries redeems or repurchases common 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.
Telekom Austria 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 Telekom Austria. The proposed securities rank junior to all present and future unsubordinated and subordinated obligations of the company, and are only senior to share capital. As per our criteria, however, we only notch the proposed notes down by one notch despite their deep subordination.
-- Unregulated Issuers’ Hybrid Instruments: Rating Methodology And Assessment Of Equity Content, March 17, 2011
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- Summary Analysis Telekom Austria AG, Jan. 21, 2013