Belgium-Based Elia System Operator#s Proposed Hybrid Notes Rated #BBB-#

Stocks and Financial Services Press Releases Wednesday May 16, 2018 17:54
FRANKFURT--16 May--S&P Global Ratings

FRANKFURT (S&P Global Ratings) May 16, 2018--S&P Global Ratings today assigned its 'BBB-' issue rating to the proposed perpetual, optionally deferrable, and subordinated hybrid notes to be issued by Elia System Operator S.A./N.V. (BBB+/Stable/A-2).

We understand that Elia will use the cash proceeds from the notes to acquire an additional 20% stake in Eurogrid International, the legal owner of Eurogrid GmbH's regulated electricity network, 50Hertz Transmission GmbH (see "Elia System Operator 'BBB+/A-2' Ratings Affirmed On Plans To Acquire Additional Stake In 50Hertz," published March 23, 2018, on RatingsDirect). We understand that the issuance amount is about EUR700 million, which is within our 15% adjusted capitalization ratio threshold for assigning equity content.

We classify the proposed notes as having intermediate equity content until their first call date in August 2023 ("first reset date," as per the terms and conditions) because they meet our criteria in terms of their subordination, permanence, and optional deferability during this period (see "Hybrid Capital Handbook: September 2008 Edition," published Sept. 15, 2008, and "Assigning Equity Content To Hybrid Capital Instruments Issued By Corporate Entities And Other Issuers Not Subject To Prudential Regulation," published Jan. 16, 2018).

Consequently, in our calculation of Elia's credit ratios, we will treat 50% of the principal outstanding and accrued interest under the hybrids as equity rather than debt. We will also treat 50% of the related payments on these notes as equivalent to a common dividend. Both treatments are in line with our hybrid capital criteria.

We arrive at our 'BBB-' issue rating on the proposed notes by deducting two notches from our 'BBB+' long-term issuer credit rating (ICR) on Elia. We determine the rating differential according to our methodology, under which:

  • We deduct one notch for the subordination of the proposed notes, since the ICR on Elia is investment grade ('BBB-' or higher); and
  • We deduct an additional notch for payment flexibility to reflect that the deferral of interest is optional.

The latter is only one notch because we consider that there is a relatively low likelihood that Elia will defer interest payments. Should our view of this likelihood change, we may significantly increase the number of notches we deduct from the ICR to derive the issue rating.

The interest to be paid on the proposed notes will increase by 25 basis points (bps) no earlier than 10 years after issuance and by a further 75bps 20 years after the first call date in August 2023. We consider the cumulative 100bps for the notes as a material step-up that is currently unmitigated by any commitment to replace the respective instruments at that time. This provides an incentive for Elia to redeem the instruments on the August 2043 call date.

Consequently, we will no longer recognize the instruments as having intermediate equity content after the first call date (August 2023), because the remaining period until economic maturity would be less than 20 years.

Until the first call date, we will classify the notes' equity content as intermediate as long as we think that a change in that classification would not cause Elia to call the instruments. Elia's willingness to maintain or replace the instrument in the event that the equity content is reclassified as minimal is underpinned by its statement of intent.


Although the proposed notes have no final maturity date, the issuer may redeem them for cash during the 90-day period before the first call date in August 2023, and on each interest payment date thereafter. In addition, the notes may be purchased at any time in the open market. The issuer intends, but is not obliged, to redeem or repurchase the notes only to the extent that they are replaced with instruments with equivalent equity content. In addition, the notes may be called at any time for tax, rating, or accounting events, or if 80% or more of the notes have already been redeemed.


In our view, Elia's option to defer payment on the proposed notes is discretionary. This means that Elia may elect not to pay accrued interest on an interest payment date. Elia retains the option to defer interest throughout the life of the notes. However, any outstanding deferred interest is cumulative, and will ultimately be settled in cash if, for example, the issuer paid interest on the next interest payment date, or it declared a dividend. We see this as a negative factor, but this condition remains acceptable under our methodology because the issuer can still choose to defer on the next interest payment date after settling a previously deferred amount.

The proposed notes (and coupons) would constitute unsecured and subordinated obligations of the issuer. The notes rank senior only to the issuer's ordinary shares.

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