(The following statement was released by the rating agency)
Feb 06 - Fitch Ratings has assigned Electricite de France (EDF, ‘A+'/Stable) multicurrency reset perpetual subordinated notes a ‘A-’ final rating.
The multicurrency hybrid notes are deeply subordinated and rank senior only to EDF’s share capital, while coupon payments can be deferred at the option of the issuer. These features are reflected in the ‘A-’ rating, which is two notches down from EDF’s ‘A+’ Long-term Issuer Default Rating (IDR) reflecting the notes’ increased loss severity and heightened risk of nonperformance relative to the senior obligations. This approach is in accordance with Fitch’s criteria, “Treatment and Notching of Hybrid in Nonfinancial Corporate and REIT Credit Analysis” dated 13 December 2012 at www.fitchratings.com.
The notes 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 combined amount of the issue is approximately EUR6.2bn and is split among four tranches as follows:
- USD3bn at 5.25% coupon with 10-year first call date
- EUR1.25bn at 4.25% coupon with a seven-year first call date
- EUR1.25bn at 5.375% coupon with a 12-year first call date
- GBP1.25bn at 6.00% coupon with 13-year first call date
The 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 (which is within Fitch’s step-up threshold of 100bps), but 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. According to Fitch’s criteria, the equity credit of 50% would change to 0% five years before the effective remaining maturity dates.
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-year 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, which results in 50% equity treatment and 50% debt treatment of the hybrid notes by Fitch. 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, meant 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 hybrid issue will mitigate the pressure on leverage ratios, projected by Fitch to be around 3.0x for 2012-13 (funds from operations (FFO) adjusted net leverage).
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) adjusted 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 adjusted 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.