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Hybrids: S&P Pulls the "Sliding" Steps Away
Andrew Moulder - Head of Utilities, CreditSights
Andrew Belton - Head of Basics and Infrastructure, CreditSights
Mihir Trivedi - Analyst, Construction / Infrastructure, CreditSights
EXECUTIVE SUMMARY
- Following its request for comment S&P has decided not to give equity content to hybrids which incorporate a sliding step. The affected instruments belong to EDP, Cemex and Abertis. There is no grandfathering and we expect the equity content will be removed from these hybrid bonds.
- S&P has also reiterated its original view that any change in the equity content of the affected instruments is currently not expected to have any direct rating impact. The affected bonds will still receive 50% equity content from Moody’s and Fitch, if they are rated by the other agencies.
- The change in equity content would be a rating event and the affected issues could be called at 101. Three of the affected issues are currently trading above 101, two at EDP and one at Cemex. We believe the Cemex hybrid is most exposed.
- EDP is committed to the hybrid asset class and to the maintenance of at least a flat BBB rating, and we expect the company to meet market expectations in the way it adjusts to this S&P change. That could be an amendment to terms or a tender and refinance but whatever EDP does we would not expect hybrid holders to be disadvantaged. We believe an amendment to terms is most likely.
- Unlike EDP, it is not a given that Cemex is committed to the hybrid asset class and the company has told us that it has yet to make a formal decision what to do about its hybrids. In credit terms the loss of equity credit does not move the needle for Cemex. However holders of the Cemex hybrids will have to price in the risk of an unfavourable decision by Cemex into their return parameters. Our own view has been that the best way to play our Outperform Recommendation on Cemex was through the Seniors and this preference is only reinforced by S&P’s decision.
- This is not a big change, it affects only three issuers and it is not going to disrupt the hybrid market. A bigger issue is the constant evolution of the various methodologies around hybrid bonds. Investors need to make sure they are comfortable with, and fully aware of, the risks inherent in hybrid instruments.
Following its request for comment and our article, Slip Slidin’ Away, which discussed the proposed changes and the potentially affected hybrids, S&P has indeed decided not to give equity content to hybrids which incorporate a sliding step.
The criteria update was published on 10 February and becomes effective immediately except in Mexico and Uruguay, where it will only become effective once the relevant regulatory authorities complete their registration process.
While the criteria becomes effective immediately (and after regulatory approvals in Mexico and Uruguay) the decision to remove equity content on any particular hybrid needs to be taken by a rating committee, and we expect that to be done for the affected issues in the near future.
In its release S&P states that the equity content of the hybrids shown below may be lowered as a result of the revised criteria.
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