PTTEP#s Proposed Subordinated Perpetual Capital Securities Assigned #BB+# Rating And Intermediate Equity Content

Stocks and Financial Services Press Releases Monday June 26, 2017 09:15
SINGAPORE--26 Jun--S&P Global Ratings

SINGAPORE (S&P Global Ratings) June 26, 2017--S&P Global Ratings today assigned its 'BB+' long-term issue rating to two proposed subordinated perpetual capital securities to be issued by PTTEP Treasury Center Co. Ltd. (PTTEPTC). PTTEPTC is a financing subsidiary set up by PTT Exploration and Production Public Co. Ltd. (PTTEP: BBB+/Stable/--; axA+/--).

PTTEPTC is offering two hybrid securities in conjunction with a tender offer for the outstanding US$1 billion hybrids PTTEP issued in 2014. Participating holders will have an option to receive either of two proposed hybrids: (1) hybrids with the same terms and substance as the outstanding 2014 hybrids but with PTTEPTC as the issuer instead of PTTEP, and offered in a like-kind exchange exercise ("like-kind hybrids"); or (2) new hybrids with a first call date in 2022 ("new hybrid securities"). The terms and conditions on subordination, optional deferral of distributions, capital replacement of the proposed hybrid securities, and management's intent to keep hybrid capital as a permanent element of the capital structure are similar to those of the outstanding US$1 billion hybrids PTTEP issued in 2014.

In addition, the partial hybrid buy-back and replacement is being done in response to an external event, namely the enactment of a new withholding tax regulation. As a result, we consider the proposed hybrid securities to have intermediate equity content. We will therefore classify 50% of the principal as debt and 50% of the distributions as interest expenses in our calculation of financial ratios.

We understand PTTEP will treat the securities as equity in its financial statements. Our assessments of the equity content and issue rating are subject to our review of the final issuance documentation. The issuance of the proposed instruments does not affect our view that management intends to maintain hybrid capital as a permanent feature of PTTEP's capital structure. That is because the company is undertaking this transaction as the result of a one-off change in withholding taxation rules in Thailand, rather than as an opportunistic move to refinance at a cheaper cost.

The PTTEP management's intent as regards to the permanence of hybrid instruments in the capital structure is an important consideration for our analysis. The issuance of the proposed instruments does not affect the corporate credit rating on PTTEP either.

The company will use the proceeds for general corporate purposes, including, but not limited to, on-lending to entities within the PTTEP corporate group. In any case, PTTEP will maintain at least US$1 billion in perpetual securities after this transaction. We arrived at our 'BB+' issue rating on the securities by notching down from our 'bbb' stand-alone credit profile (SACP) on PTTEP. The rating on the proposed perpetual securities is two notches below


We use the SACP as a reference point for notching the perpetual securities because the Thai government does not have a track record of support to equity-like instruments issued by state-owned companies or subsidiaries of state-owned companies in Thailand. The two-notch differential between the issue rating and the SACP reflects our notching methodology, which calls for: A one-notch deduction for subordination to all current and future senior debt obligations of the company; andAn additional one-notch deduction for deferral of interest perpetually at the company's option.The terms and conditions of the "like-kind hybrids" are similar to the outstanding hybrids, including distribution rates, first call date (2019), and capital replacement clause.

The new hybrid securities will pay a fixed distribution until 2022. From 2022 to 2027, the securities will pay a distribution based on the equivalent five-year U.S. Treasury rate plus an initial credit spread. In 2027, the credit spread above the Treasury rate will step up by 25 basis points and by an additional 75 basis points in 2042. The securities are callable in 2022, 2027, and every distribution payment date thereafter. They also have a limited number of additional issuer call rights linked to the occurrence of certain prescribed external events, such as a change in taxation and accounting, change in rating agency equity credit assessment, and a change of control.

PTTEP's management is maintaining the perpetual securities as a permanent component of its capital structure, in our view, even though the company is undertaking this transaction before the end of the five-year non-call period indicated in the terms and conditions of the outstanding perpetual securities. The main objective of the transaction is to benefit from recent changes under the Thai Revenue Code--not from the lower interest rate environment. The revenue code now provides withholding tax exemptions for interest and distribution payments from a qualified entity.

PTTEP also views this partial refinancing as a one-off event, which it does not intend to repeat within the next five years even if the interest rate environment becomes more favorable.

PTTEP has exhibited prudent financial management over the past five years, including during the oil price slump. In our view, maintaining the perpetual securities as part of the company's capital structure provides additional headroom under its leverage tolerance.

PTTEP also intends to replace the proposed perpetual securities with an instrument that has equal or greater equity content (except in limited circumstances) if the securities are called before 2039 (for the like-kind hybrids) and 2042 (for the new hybrid securities). We could lower our assessment of the equity content on the proposed subordinated perpetual capital securities as well as PTTEP's existing subordinated perpetual capital securities to minimal, from intermediate, if the company indicates any deviation from its intention to maintain hybrid securities as a permanent part of the capital structure. A minimal equity content means we would treat the full principal of the securities as debt and all the distributions as interest expenses.

According to our criteria, the proposed securities will fall to minimal equity content in no more than two years (for the like-kind hybrids) and no more than five years (for the new hybrid securities). This is because the remaining time to expected maturity from those dates will be shorter than the minimum of 20 years required to maintain an intermediate equity content. We define the expected maturity as the date when there is a material step-up in the coupon rate for the instrument, 100 basis points from the initial spread in the case of these securities.

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