Rating Action: Moody's assigns Ba1 rating to ENEL S.p.A.'s hybrid notes; positive outlook
Global Credit Research - 01 Sep 2020
Paris, September 01, 2020 -- Moody's Investors Service ("Moody's") has today assigned a Ba1 long-term rating to the junior subordinated Capital Security (the "Hybrid") to be issued by ENEL S.p.A. ("Enel"). The size and completion of the Hybrid are subject to market conditions. The outlook is positive.
The Ba1 rating assigned to the Hybrid is two notches below Enel's senior unsecured rating of Baa2, reflecting the features of the Hybrid. It is very long-dated, deeply subordinated and Enel can opt to defer coupons on a cumulative basis. The rating is in line with those of the existing hybrid notes issued by the company.
In Moody's view, the Hybrid has equity-like features which allow it to receive basket "C" treatment (i.e. 50% equity and 50% debt) for financial leverage purposes. Please refer to Moody's Cross-Sector Rating Methodology "Hybrid Equity Credit" (September 2018) for further details.
As the Hybrid's rating is positioned relative to another rating of Enel, a change in either (1) Moody's relative notching practice; or (2) the senior unsecured rating of Enel could affect the Hybrid's rating.
Enel's Baa2 rating is underpinned by (1) its large scale and geographical diversification, which help dampen earnings volatility; (2) stable earnings stemming from regulated networks and contracted generation, which account for around 80% of group EBITDA; and (3) a solid financial profile, with funds from operations (FFO)/debt in excess of 20% for 2019.
The rating also considers (1) the company's exposure to Italy (Baa3 stable), where it generates a substantial proportion of its earnings; (2) political and regulatory risks in some of the other countries where it operates, including Spain (Baa1 stable) and the lower-rated Brazil (Ba2 stable); (3) the group's large capital spending programme of E28.7 billion for 2020-22, although it has a track record of successful execution and is not exposed to, for example, the risks associated with large offshore wind developments; (4) a minimum dividend payout, which may somewhat constrain its financial flexibility; and (5) the substantial minority holdings in the group, which reduce retained cash flow (RCF) and add to complexity.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Enel's progress in delivering against its strategic priorities. In particular, it takes into account the company's recent financial performance and the potential for continued earnings growth, increasing international diversification with a corresponding reduction in the proportion of earnings from Italy and improving business-risk profile as a result of continuing investments in networks and renewables.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Enel's ratings could be upgraded if (1) progress against its strategic priorities were to result in a sustained strengthening of the group's financial profile, reflected in its credit metrics, including FFO/net debt above 20% and RCF/net debt in the low teens in percentage terms; and (2) there is continued growth in its international activities, such that the proportion of domestic earnings and its exposure to economic and political risks in Italy decreases.
The ratings could be downgraded if the group were unable to maintain a financial profile consistent with the guidance for the current rating, such that its FFO/net debt was below the mid-teens and RCF/net debt was below the low single digits, both in percentage terms; or the delivery of Enel's strategy of switching its business-risk profile to lower-risk activities was challenged. This could be because of, for example, worse-than-expected regulatory settlements in Italy, Spain, Brazil, Chile or Mexico.
The methodologies used in this rating were Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Enel is the principal electric utility in Italy and is owned 23.6% by the Italian State. In 2019 it generated EBITDA of EUR17.9 billion.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Benjamin Leyre VP - Senior Credit Officer Infrastructure Finance Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Neil Griffiths-Lambeth Associate Managing Director Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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