Spanish Power Company Iberdrola's Proposed Junior Subordinated Hybrid Rated 'BBB-' With Intermediate Equity Content

  • Spain-based energy company Iberdrola plans to issue a junior subordinated hybrid security.
  • We assess the proposed security as having intermediate equity content.
  • We are assigning our 'BBB-' issue rating to the proposed security to reflect its subordination and optional deferability.
MADRID (S&P Global Ratings) Feb. 5, 2019--S&P Global Ratings said today that 
it had assigned its 'BBB-' long-term issue rating to the proposed perpetual, 
optionally deferrable, and subordinated hybrid capital security to be issued 
by Iberdrola International B.V. and guaranteed by Iberdrola S.A. (Iberdrola; 
BBB+/Stable/A-2). The amount of the hybrid remains subject to market 
conditions.

We consider the proposed security to have intermediate equity content until 
its first reset date because it meets our criteria in terms of subordination, 
permanence, and deferability at the company's discretion during this period. 
We understand this proposed issuance will be an addition to the two hybrid 
instruments previously issued in November 2017 and April 2018, for a total 
amount of €1.7 billion.

We arrive at our 'BBB-' issue rating on the proposed security by notching down 
from our 'BBB+' issuer credit rating (ICR) on Iberdrola. The two-notch 
differential reflects our notching methodology, which calls for deducting:
  • One notch for subordination because our long-term ICR on Iberdrola 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 security 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 security, we allocate 50% of the related payments on the security 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

Although the proposed security is perpetual, it can be called at any time for 
tax, gross-up, rating, accounting, or a change-of-control event. 

Iberdrola can redeem the security for cash at any time during the 90 days 
before the first interest reset date, which we understand will not be earlier 
than 5.25 years, and on every coupon payment date thereafter. If any of these 
events occur, Iberdrola intends, but is not obliged, to replace the 
instruments. 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 security will 
increase by 25 basis points (bps) no earlier than 10 years from issuance, and 
by a further 75bps 20 years after its first reset date. We consider the 
cumulative 100bps as a material step-up, which is currently unmitigated by any 
binding commitment to replace the instrument at that time. This step-up 
provides an incentive for the issuer to redeem the instrument on its second 
step-up date.

Consequently, we will no longer recognize the instrument as having 
intermediate equity content after its first reset date, because the remaining 
period until its economic maturity would, by then, be less than 20 years. 
However, we classify the instrument's 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 
instrument at that point. Iberdrola's willingness to maintain or replace the 
instrument in the event of a reclassification of equity content to minimal is 
underpinned by its statement of intent. Finally, the green label of the 
instrument does not impact the issue rating, or the equity content.


KEY FACTORS IN OUR ASSESSMENT OF THE SECURITIES' DEFERABILITY

In our view, Iberdrola's option to defer payment on the proposed security is 
discretionary. This means that Iberdrola 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 Iberdrola declares or pays an equity 
dividend or interest on equally ranking securities, and if Iberdrola redeems 
or repurchases shares or equally ranking securities. We see this as a negative 
factor. That said, this condition remains acceptable under our methodology 
because, once Iberdrola 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 security and coupons are intended to constitute the issuer's 
direct, unsecured, and subordinated obligations, ranking senior to their 
common shares.
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