Fitch Rates Gas Natural Fenosa Finance's EUR500m Hybrid Notes 'BBB-(EXP)'

martes 21 de abril de 2015 12:13 GYT

(The following statement was released by the rating agency) LONDON/WARSAW/BARCELONA, April 21 (Fitch) Fitch Ratings has assigned Gas Natural Fenosa Finance BV's proposed deeply subordinated hybrid securities an expected rating of 'BBB-(EXP)'. The proposed securities qualify for 50% equity credit. The proposed notes will be unconditionally and irrevocably guaranteed by Gas Natural SDG, S.A. (Gas Natural, BBB+/Stable) on a subordinated basis. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation reviewed. A full list of Gas Natural's ratings is available at the end of this commentary. The notes' rating and assignment of equity credit are based on Fitch's hybrid methodology, dated 25 November 2014 ("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 proposed notes are rated two notches below 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 proposed 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. Equity credit is limited to 50% given the cumulative interest coupon, a feature considered more debt-like in nature. Effective Maturity Date While the proposed notes are perpetual, Fitch deems the effective, remaining maturity as 2044 (nine-year non-call hybrids), in line 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 2024 (nine-year non-call hybrids) 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 and on the proposed hybrid bonds. Both preference share 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 de-leveraging following the acquisition. We expect that the acquisition will temporarily weaken credit ratios to above our negative rating guideline in 2015 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. 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 unfavorable regulatory changes in the past few years. We consider CGE a sensible 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 4x in 2015. This eliminates rating headroom for the company. The planned EUR500m hybrid bond issue with 50% equity credit will have little positive impact on the company's net leverage (reducing it by 0.05x). 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 current strategy. We expect the company's updated business plan - to be delivered by end-2015 - to communicate a continuation of this deleveraging trend. Easing Spanish Regulatory Risk The recent reforms implemented in Spain for electricity and gas have successfully tackled the tariff deficit issue. In a financially more balanced and sustainable electricity and gas system we expect regulatory and political risk to decrease. The company's 2014 revenues were reduced by EUR141m due to regulatory changes, of which 70% is from electricity distribution. Fitch expects pending reforms (ie, remaining parameters for electricity distribution, capacity payments and mothballing) to affect future earnings to a lesser extent. 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 2014 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 2014 EBITDA was quasi-regulated, comprising mostly long-term contracted generation in Latam (PPAs). KEY ASSUMPTIONS -2015 EBITDA around EUR5.5bn and a CAGR around 5.5% for 2016-2018 -Capex of EUR2bn on average for 2015-2018, including CGE's capex needs -Dividends consistent with a 62% payout ratio as per current strategy -Excess positive FCF (after dividends) allocated to de-leveraging -New hybrid issuance of EUR500m with 50% of equity credit issued in 2015 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 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 31 December 2014, Gas Natural had cash and cash equivalents of EUR3.6bn plus available committed credit facilities of EUR7bn, of which EUR6.1bn are maturing beyond 2016. This is sufficient to meet debt maturities of EUR5.1bn over the next 24 months. We expect Gas Natural to generate positive FCF in 2015-2018. 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-' Proposed ubordinated hybrid capital securities assigned expected rating of 'BBB-(EXP)' 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 Raymond Hill Senior Director +44 20 3530 1079 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 25 November 2014 , 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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