OREANDA-NEWS. S&P Global Ratings said today that it had assigned its 'BBB-' long-term issue rating to the proposed long-dated, optionally deferrable, and junior subordinated hybrid capital securities to be issued by German integrated utility EnBW Energie Baden-Wuerttemberg AG (A-/Negative/A-2). Under this transaction, EnBW plans to issue up to two tranches, one denominated in euros, the other in U. S. dollars. The amount of these tranches remains subject to market conditions.

We consider that the proposed securities have intermediate equity content until their first call date in 2022 based on their subordination, permanence, and optional deferability during this period (see "Hybrid Capital Handbook: September 2008 Edition," published Sept. 15, 2008, on RatingsDirect).

We assume that EnBW will use proceeds from the proposed instruments to replace two hybrid tranches it issued in 2011 and 2012 (€750 million and €250 million), which contain a call option on April 2, 2017. We understand that EnBW has yet to make a decision to call the 2011 and 2012 securities, but the company is prudently raising funds through hybrid issuance to meet potential redemption on their first call date. Due to the increased likelihood of EnBW exercising the call option, in our opinion, we now treat the upcoming call date of the 2011 and 2012 securities as the effective maturity date. We have consequently reassessed their equity content to minimal from intermediate due to the lack of permanence.

In our view, EnBW is committed to maintaining its hybrid capital as a permanent feature in its capital structure. The proposed issue of new hybrid securities does not affect our view of the intermediate equity content of EnBW's existing hybrid securities of €1 billion issued in 2014. Furthermore, if we treat the proposed securities as replacement capital, EnBW's total amount of hybrid securities will remain close to our upper limit of 15% of its capitalization and might even exceed 15% in 2016 because of factors outside of management's control, namely sizable impairments in recent years. Therefore, at this stage, we are maintaining our assessments of the company's financial policy as prudent and of the hybrid securities equity content as intermediate. However, in our calculation of credit ratios for EnBW, we will not factor in any equity benefit on the hybrid amount exceeding 15% of EnBW's adjusted capital. Our calculation of EnBW's credit metrics remains almost unchanged because we will deduct from debt the cash proceeds of the proposed instruments until the 2011 and 2012 securities are redeemed.

We arrive at our 'BBB-' issue rating on the securities by notching down from our 'bbb+' stand-alone credit profile (SACP) on EnBW. The two-notch differential between the issue rating and the SACP reflects our notching methodology, which calls for:

A one-notch deduction for subordination because the corporate credit rating on EnBW is investment grade (that is, higher than 'BB+'); andAn additional one-notch deduction for payment flexibility to reflect that the deferral of interest is optional. The notching of the new securities is linked to our perception of a relatively low likelihood of deferral. Should our perception change, we may increase the notching significantly and, in relative terms, more quickly than a revision of the corporate credit rating.

In addition, in view of what we see as the intermediate equity content of the proposed securities, we allocate 50% of the related payments on these securities as a fixed charge and 50% as an equivalent of a common dividend, in line with our hybrid capital criteria. The 50% treatment (of principal and accrued interest) also applies to our adjustment of debt.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S PERMANENCEAlthough the securities have a stipulated maturity exceeding 60 years, they can be called at any time following the occurrence of tax, rating, or accounting events. In addition, we understand that the issuer can redeem them for cash on the first call date 5.5 years after issuance and every annual coupon date thereafter. If any of these events occur, the issuer intends, but is not obliged, to replace the instrument. 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 securities will increase by 25 basis points 10.5 years after issuance and by a further 75 basis points 25.5 years after issuance. We consider the cumulative 100 basis points as a material step-up, which is currently unmitigated by any commitment to replace the instruments at that time. This step-up provides an incentive for EnBW to redeem the instrument on the first call date.

Consequently, we will no longer recognize the instrument as having intermediate equity content after the first call 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 the first call date as long as we believe that the loss of the beneficial intermediate equity content treatment will not cause the instrument to be called at that point. EnBW's willingness to maintain or replace the instrument at the first call date is underpinned by its statement of intent.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S DEFERABILITYIn our view, EnBW's option to defer payment on the securities is discretionary. This means that the issuer 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 will have to be settled in cash should an ordinary general meeting of shareholders vote to pay a common dividend. In addition, the deferred interest will also have to be settled if the issuer or any subsidiary makes certain payments, such as paying a dividend, or repurchasing an equal ranking or junior security, subject to exceptions such as intragroup payments. We see this as a negative factor. That said, this condition remains acceptable under our methodology because once the issuer has settled the deferred amount, it can still choose to defer on the next interest payment date.

The option to defer interest on the securities is unlimited in time, which supports the equity content of the instrument. Deferred interest payments do not bear interest but will ultimately be settled in cash.

KEY FACTORS IN OUR ASSESSMENT OF THE INSTRUMENT'S SUBORDINATIONThe securities (and coupons) are intended to constitute direct, unsecured, and subordinated obligations of EnBW. The securities rank senior to common and preferred shares.