Italian Energy Co. Enel SpA#s Proposed Hybrid Instruments Rated #BBB-# With Intermediate Equity Content

Stocks and Financial Services Press Releases Monday May 14, 2018 17:39
PARIS--14 May--S&P Global Ratings

PARIS (S&P Global Ratings) May 14, 2018--S&P Global Ratings said today that it has assigned its 'BBB-' long-term issue rating to the proposed hybrid capital securities to be issued by Enel SpA (BBB+/Stable/A-2). The amount of the hybrids remains subject to market conditions, but we understand it will be at least EUR1.25 billion. The proceeds will be used to fully replace the existing EUR1.25 billion hybrid issued in 2013, with a first call date in 2019, and partially refinance its EUR1.0 billion hybrid issued in 2014 with a first call date in 2020.

We consider the proposed securities to have intermediate equity content until its first reset date because they meet our criteria in terms of subordination, permanence, and deferability at the company's discretion during this period.

In addition to announcing the planned issuance, Enel launched an any-and-all tender offer on the existing EUR1.25 billion hybrid issued in 2013, and an exchange offer on the EUR1.0 billion hybrid with a non-call date in 2020 issued in 2014, the latter being capped at EUR500 million. We understand that, after the replacement and liability management transactions, the group intends to permanently maintain the total amount of hybrids outstanding at its current level (which is about EUR4.3 billion).

If Enel successfully issues the new securities and completes the liability management transaction, we will assign minimal equity content to the existing EUR1.25 billion issued in 2013, but maintain our view of intermediate equity content in the remaining amount under the EUR1.0 billion issued in 2014, which would not have been exchanged as part of this transaction. This is because we believe Enel remains committed to the permanence of the hybrid capital layer and would therefore be committed to replacing the instrument ahead of any future call/buyback.

We arrive at our 'BBB-' issue rating on the proposed securities by notching down from our 'BBB+' issuer credit rating (ICR) on Enel. The two-notch difference reflects our notching methodology, which calls for deducting:

  • One notch for subordination because our long-term ICR on Enel is investment grade (that is, higher than 'BB+'); and
  • An additional notch for payment flexibility, to reflect that the deferral of interest is optional.

The notching to rate the proposed securities reflects our view that there is a relatively low likelihood that the issuer will defer interest. Should our view change, we may increase the number of notches we deduct to derive the issue rating.

In addition, to reflect our view of the intermediate equity content of the proposed securities, we allocate 50% of the related payments on the securities as a fixed charge and 50% as equivalent to a common dividend. The 50% treatment of principal and accrued interest also applies to our adjustment of debt.

KEY FACTORS IN OUR ASSESSMENT OF THE SECURITIES' PERMANENCE

Enel can redeem the securities for cash at any time during the 90 days before the first interest reset date, which we understand will not be earlier than five years and three months from issuance, and on every coupon payment date thereafter. Although the proposed notes have a final maturity date no earlier than 2078, they can be called at any time for a tax, gross-up, rating, accounting, or change-of-control event. If any of these events occur, Enel intends, but is not obliged, to replace the instruments. In addition, in case one of these events occur, we note that Enel can change terms of the documentation at its sole discretion, but with prior notice to bondholders, subject to the condition that the rating and our assessment of equity content remain unchanged (among other conditions, including not being prejudicial to investors).

In our view, this statement of intent mitigates the issuer's ability to repurchase the notes on the open market. We understand that the interest to be paid on the proposed securities will increase by 25 basis points (bps) no earlier than 10 years from issuance, and by a further 75bps 20 years after its respective first reset date. We consider the cumulative 100bps as a material step-up, which is currently unmitigated by any binding commitment to replace the instruments at that time. This step-up provides an incentive for the issuer to redeem the instruments on the first reset date.

Consequently, we will no longer recognize each instrument as having intermediate equity content after its first reset date, because the remaining period until its economic maturity would then be less than 20 years. However, we classify the instruments' equity content as intermediate until its first reset date, as long as we think that the loss of the beneficial intermediate equity content treatment will not cause the issuer to call the instruments at that point. Enel's willingness to maintain or replace the instruments in the event of a reclassification of equity content to minimal is underpinned by its statement of intent.

KEY FACTORS IN OUR ASSESSMENT OF THE SECURITIES' DEFERABILITY

In our view, Enel's option to defer payment on the proposed securities is discretionary. This means that Enel 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, plus interest accrued thereafter, will have to be settled in cash if Enel declares or pays an equity dividend or interest on equally ranking securities, and if Enel redeems or repurchases shares or equally ranking securities. However, once Enel has settled the deferred amount, it can still choose to defer on the next interest payment date.

KEY FACTORS IN OUR ASSESSMENT OF THE SECURITIES' SUBORDINATION
The proposed securities and coupons are intended to constitute the issuer's direct, unsecured, and subordinated obligations, ranking senior to their common shares.

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