: Corporate hybrid debt methodologies: S&P strikes back

Last 13 November, S&P issued a Request For Comment (RFC) whereby the rating agency is proposing changes to how it classifies equity content in certain hybrid debts featuring sliding step-up clauses . For the concerned instruments, equity treatment would move from 50% to 0%. In its RFC, the rating agency mentioned “ about 5 issuers ” / “about 10 instruments ” concerned. For the circa 5 issuers concerned, S&P does not expect any immediate rating impact. We see EDP most exposed to this methodology change , with 6 out of 7   hybrids at risk of losing their 50% equity content , a total of €3.75bn of outstandings (excluding one c.25, €750m instrument which has already been refinanced). Having built a substantial hybrid stock and enjoying limited headroom for the preservation of its BBB rating at S&P, EDP is most likely to take action to amend the concerned prospectuses to comply with S&P’s new rules and eventually preserve the equity contents at risk. W e expect EDP to refrain from sending negative signals to bondholders in the form of an early redemption for rating event below the current cash price for those instruments trading above par (the c.30 and the c.28 debts with cash prices of 102 and 105, respectively). To this end, EDP will have to seek approval from bondholders and will probably need to offer them a consent fee . Interestingly, among the other issuers exposed to the methodology change, Spanish infrastructure operator Abertis has already taken steps to refinance one of its two hybrids with sliding step-ups, using a structure aligned with S&P’s new hybrid criteria . …