LafargeHolcim's Proposed Hybrid Securities Rated 'BB+' And Assessed As Having Intermediate Equity Content

  • Switzerland-based building materials maker LafargeHolcim intends to issue new subordinated securities of benchmark size.
  • We assess the proposed securities as having intermediate equity content.
  • We are assigning our 'BB+' issue rating to the proposed securities, reflecting their subordination and optional deferability.
LONDON (S&P Global Ratings) April 1, 2019--S&P Global Ratings assigned its 
'BB+' long-term issue rating to the proposed new subordinated securities to be 
issued by Holcim Finance (Luxembourg) S.A., a 100% owned and controlled 
finance subsidiary of Switzerland-based building materials maker LafargeHolcim 
Ltd., which will guarantee the proposed notes.

We understand LafargeHolcim intends to use the notes' proceeds to redeem 
existing debt and so improve the group's debt maturity profile, interest 
expense, and leverage ratios. Following this issuance, LafargeHolcim's ratio 
of outstanding hybrids to adjusted capitalization will remain well below the 
15% limit for us to view hybrid leverage as having intermediate equity 
content. 

We classify the proposed new subordinated securities as having intermediate 
equity content until the first reset date, because the securities meet our 
criteria in terms of their subordination, permanence, and optional 
deferability during this period. Consequently, when we calculate 
LafargeHolcim's adjusted credit ratios, we will treat 50% of the principal 
outstanding and accrued interest under the proposed securities as equity, 
rather than debt, and 50% of the related payments on these securities as 
equivalent to a common dividend.

The two-notch difference between our 'BB+' issue rating on the proposed hybrid 
notes and our 'BBB' issuer credit rating (ICR) on LafargeHolcim signifies that 
we have made the following downward adjustments from the ICR: 
  • One notch for the proposed notes' subordination, because our long-term ICR on LafargeHolcim is investment-grade; and
  • An additional notch for payment flexibility due to the optional deferability of interest.
The notching of the proposed securities reflects our view that LafargeHolcim 
is relatively unlikely to defer interest payments. Should our view change, we 
may significantly increase the number of downward notches that we apply to the 
issue rating. We may lower the issue rating before we lower the ICR.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S PERMANENCE
Although the proposed securities are perpetual, LafargeHolcim can redeem them 
any time between five years after the issue date up to the first reset date, 
and on each annual interest payment date thereafter. If the securities are 
called, the company intends to replace the proposed instrument, although it is 
not obliged to do so. In our view, this statement of intent mitigates the 
issuer's ability to repurchase the notes.

The interest to be paid on the proposed securities will increase by 25 basis 
points (bps) five years after the first reset date, and by a further 75 bps 20 
years after the first reset date. We view the cumulative 100 bps as a moderate 
step-up, which provides LafargeHolcim with an incentive to redeem the 
instruments at that time.

Consequently, we will no longer recognize the proposed instrument as having 
intermediate equity content after the 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.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S SUBORDINATION
The proposed securities will be guaranteed on a deeply subordinated basis by 
LafargeHolcim and have a perpetual maturity. As such, they will be 
subordinated to senior debt instruments, and only senior to junior obligations 
(common share capital) of the group.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S DEFERABILITY
In our view, LafargeHolcim's can choose to defer payment of interest on the 
proposed securities at its own discretion. It has no obligation to pay accrued 
interest on an interest payment date. However, any outstanding deferred 
interest payment would have to be settled in cash if an equity dividend or 
interest on equal-ranking securities is paid, or if common shares or 
equal-ranking securities are repurchased.

This condition remains acceptable under our rating methodology because, once 
the issuer has settled the deferred amount, it can choose to defer payment on 
the next interest payment date. The issuer retains the option to defer coupons 
throughout the instrument's life. The deferred interest on the proposed 
securities is cash cumulative and compounding.

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