PARIS (Reuters) - Standard & Poor’s on Friday downgraded EDF’s hybrid debt to non-investment grade, which will make refinancing the French utility’s 10 billion euros (£8 billion) worth of hybrids complicated.
Standard & Poor’s lowered its rating on EDF’s junior subordinated hybrid securities by two notches from BBB to BB+, the first level of non-investment grade.
Late on Thursday, Moody’s also downgraded EDF’s perpetual junior subordinated (hybrid) debt one notch to Baa2, but left it two levels above junk status.
Both agencies also cut EDF’s senior debt rating one notch - Moody’s to A2 from A1, S&P to A from A+ - but left the main part of EDF’s debt solidly in upper-medium investment grade.
Credit analysts say S&P’s downgrade of the hybrids to junk status will make it difficult to refinance the paper when it comes due from 2020 onwards, and is set to shock investors who suddenly find themselves with junk-rated paper on their hands.
Both agencies kept a negative outlook on EDF’s rating.
The two downgrades come just weeks after EDF announced cost cuts, asset sales, a 4 billion euro capital increase and two more years of scrip dividends to boost its finances.
EDF, which declined to comment on the downgrades on Friday, is well aware of the danger of its hybrids sinking into junk.
Last month CEO Jean-Bernard Levy said the hybrid debt was an “Achilles heel”, making EDF’s balance sheet more fragile.
Former EDF CFO Thomas Piquemal - who left EDF in March over worries about Hinkley Point’s financial risk - said last week EDF must do all it can to avoid a major downgrade, which could push the hybrids into junk status and make their refinancing from 2020 difficult.
EDF has net debt of more than 37 billion euros, excluding the hybrids. Hybrid debt has equity-like characteristics, such as the ability of the issuer to defer coupon payments.
S&P said the downgrade primarily reflects its view that EDF’s exposure to volatile commodity prices is greater than previously anticipated, and the recent drop in fuel commodities prices and European energy prices will hurt the group’s earnings and free operating cash flow generation.
S&P did not say - as it did in October - that it could downgrade further if EDF goes ahead with its 18 billion pound (23 billion euro) nuclear reactor project in Britain.
It merely said its negative outlook reflected potential additional risks such as further negative developments on nuclear newbuilds - notably the long-delayed Flamanville, France - and an investment decision on Hinkley Point.
Moody’s did warn it could downgrade further if EDF goes ahead with the UK project.
Levy on Thursday told shareholders EDF expects to give the go-ahead on Hinkley Point in the coming months.
Reporting by Geert De Clercq, editing by David Evans
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