Fitch Rates Gas Natural Fenosa Finance's EUR1bn Hybrid Notes 'BBB-'

miércoles 19 de noviembre de 2014 12:18 GYT

(The following statement was released by the rating agency) WARSAW/LONDON, November 19 (Fitch) Fitch Ratings has assigned Gas Natural Fenosa Finance BV's EUR1bn undated eight-year non-call deeply subordinated guaranteed fixed-rate reset securities (hybrid capital securities) a final rating of 'BBB-'. The securities qualify for 50% equity credit. The notes are unconditionally and irrevocably guaranteed by Gas Natural SDG, S.A. (Gas Natural, BBB+/Stable) on a subordinated basis. The rating for the hybrid capital securities reflects the highly subordinated nature of the notes, considered to have lower recovery prospects in a liquidation or bankruptcy scenario. The equity credit reflects the structural equity-like characteristics of the instruments including subordination, maturity in excess of five years and deferrable interest coupon payments. Equity credit is limited to 50% given the cumulative interest coupon, a feature considered more debt-like in nature. The notes' rating and assignment of equity credit are based on Fitch's hybrid methodology, dated 23 December 2013 ("Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" available on KEY RATING DRIVERS FOR THE NOTES Ratings Reflect Deep Subordination The notes have been notched down by two notches from Gas Natural's Long-term Issuer Default Rating given their deep subordination and consequently, the lower recovery prospects in a liquidation or bankruptcy scenario relative to the senior obligations of the issuer and guarantor. Equity Treatment The securities qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, remaining effective maturity of at least five years, full discretion to defer coupons for at least five years and limited events of default. These are key equity-like characteristics, affording Gas Natural greater financial flexibility. Effective Maturity Date 2042 While the notes are perpetual, Fitch deems the effective, remaining maturity as 2042, in accordance with the agency's hybrid criteria. From this date, the coupon step-up is within Fitch's aggregate threshold rate of 100bps, but the issuer will no longer be subject to replacement language, which discloses 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 date. The issuer has the option to redeem the notes on the first call date in 2022 and on any coupon payment date thereafter. Cumulative Coupon Limits Equity Treatment The interest coupon deferrals 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 the declaration of a cash dividend. This is a feature similar to debt-like securities and reduces the company's financial flexibility. Importantly, the payment of coupons on outstanding preference shares, issued by Union Fenosa Financial Services USA LLC in 2003 (outstanding EUR69m, rated BB+) and Union Fenosa Preferentes, S.A. in 2005 (outstanding EUR750m, rated BB) will not trigger a mandatory settlement of deferred interest payments on the EUR1bn hybrid bonds. Both preference shares issues do not have the ability to defer coupon payments without constraints. Their non-cumulative cash coupons can only be deferred under certain circumstances, subject to constraints, including the linkage of coupon payments to the prior year's net profit. As a result, Fitch allocates no equity credit to both issues. The one-notch rating differential between the 2003 and 2005 issues reflects the relative seniority of the former. KEY RATING DRIVERS FOR GAS NATURAL CGE Acquisition Fitch affirmed Gas Natural's ratings on 16 October 2014 following the company's announcement of an acquisition of Chile's Compania General de Electricidad SA (CGE, AA-(cl)/Stable) for USD3.3bn (EUR2.6bn). The rating action reflected our view that the CGE acquisition will have a moderately positive impact on Gas Natural's business profile, due to increased geographical diversification as well as our expectation of rapid de-leveraging following the acquisition. We expect that the acquisition will temporarily weaken credit ratios to above our negative rating guideline in the next 12 months but we expect funds from operations (FFO) adjusted net leverage to return to a level commensurate with the rating (below 4.0x) in 2016-2017. On 12 October, Gas Natural agreed to acquire 54% of CGE from a group of controlling stakeholders and the company has recently made a share tender offer for the remaining stake. Based on the results of the tender offer the company will buy 96.5% shares of CGE for about EUR2.55bn. In 2013 CGE's EBITDA was EUR0.6bn and net debt-to-adjusted EBITDA stood at 3.3x. Moderately Stronger Business Profile We believe that the CGE acquisition has a moderately positive impact on Gas Natural's business profile, due to increased geographical diversification, including Chile (A+/Stable), one of the highest-rated Latam countries with a predictable regulatory regime. As a result of the acquisition, Gas Natural will change its mix of Spanish versus international business to 49:51 from 56:44, reducing the company's exposure to the Spanish market, which has been subject to unfavourable regulatory changes in the past few years. We consider CGE a good strategic fit for Gas Natural due to its focus on natural gas distribution and electricity distribution and transmission, the highly regulated character of its revenues and its leading market position in Chile. Fitch expects a moderate reduction in the profitability of CGE's natural gas distribution business due to planned changes to regulations. Temporarily Weaker Credit Metrics We expect that the acquisition will temporarily weaken credit ratios to above our negative rating guideline of FFO adjusted net leverage of close to or above 4x in the next 12 months. This eliminates rating headroom for the company. However, we project FFO adjusted net leverage to return to the level commensurate with the rating (below 4.0x) in 2016 and to improve further in 2017, due to deleveraging in line with the company's strategy. The EUR1bn hybrid bond issue with 50% equity credit improves the company's net leverage by 0.1x. Regulatory Cuts in Electricity A series of regulatory changes in the Spanish electricity sector since 2012 have reduced Gas Natural's annual EBITDA by about EUR0.6bn, according to the company's estimates. Fitch expects other reforms (ie, capacity payments and mothballing) to affect future earnings to a lesser extent. Legal tail risk remains as the new measures may be tested in courts. Gas Networks Less Exposed Recent changes to the gas sector regulatory framework in Spain are expected to prevent further growth of the gas tariff deficit (TD) and introduce mechanisms to eliminate the outstanding TD in the system (around EUR0.4bn at end-2013). The negative impact of the regulatory changes on Gas Natural's EBITDA is EUR45m in 2014 and around EUR90m per year thereafter, according to Fitch's estimates. The regulatory cut is much smaller than that seen in the Spanish electricity business as the cumulative gas TD is substantially lower than the electricity TD. Balanced Business Profile The ratings are supported by Gas Natural's integrated strong business profile in both gas and electricity. A significant portion of the company's earnings (52% of 1H14 EBITDA) are regulated and mainly derived from its gas and electricity distribution activities in Spain and Latam, providing cash flow visibility. This is despite the 2012-2014 regulatory changes in Spain that reduced regulated earnings. The CGE acquisition will slightly increase the share of regulated EBITDA. In addition, about 5% of 1H14 EBITDA was quasi-regulated, comprising mostly long-term contracted generation in Latam (PPAs) and generation in the special regime in Spain. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - Reduction of FFO adjusted net leverage to around 3.0x or below on a sustained basis and FFO interest coverage around 5.5x or above (FY13: 5.2x) on a sustained basis - Improvement in the operating and regulatory environment Negative: Future developments that could lead to a negative rating action include: - FFO adjusted net leverage close to or above 4.0x and FFO interest coverage below 4.5x on a sustained basis - Substantial deterioration of the operating environment or further government measures that substantially reduce cash flows LIQUIDITY AND DEBT STRUCTURE Gas Natural's liquidity position remains strong. As of 30 September 2014, Gas Natural had cash and cash equivalents of EUR3.9bn plus available committed credit facilities of EUR6.8bn, of which EUR6.7bn are maturing beyond 2015. This is sufficient to fund the CGE acquisition and meet debt maturities of EUR4bn over the next 24 months. We expect Gas Natural to generate positive free cash flow in 2014-2016. FULL LIST OF RATINGS Gas Natural SDG, S.A. Long-term IDR of 'BBB+', Outlook Stable Short- term IDR of 'F2' Gas Natural Fenosa Finance BV Senior unsecured rating of 'BBB+' Euro commercial paper programme rating of 'F2' Subordinated hybrid capital securities' rating of 'BBB-' Gas Natural Capital Markets, S.A. Senior unsecured rating of 'BBB+' Union Fenosa Financial Services USA LLC Subordinated debt rating of 'BB+' Union Fenosa Preferentes, S.A. Subordinated debt rating of 'BB' Contact: Principal Analyst Pilar Auguets Director +34 93 467 87 47 Supervisory Analyst Arkadiusz Wicik Senior Director +48 22 338 6286 Fitch Polska S.A. Krolewska 16 00-103 Warsaw Committee Chair Angelina Valavina Senior Director +44 20 3530 1314 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014, and 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis', dated 23 December 2013, are available at Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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