OREANDA-NEWS. Strong demand for Total's EUR5bn of hybrid bond issues may tempt other European oil and gas companies to tap the market while oil prices remain weak, Fitch Ratings says.

Major oil companies are cutting spending in response to crude's price downturn. But they expect prices to recover eventually and are likely to be wary of very deep capex cuts in case they set projects too far behind schedule when the investment position improves. They may also face shareholder pressure to maintain dividends and will have to balance these demands against a likely desire not to significantly weaken their credit profile.

Other sectors facing a similar combination of high capex requirements and a tough operating environment in recent years have turned to hybrids to shore up their balance sheet and provide some flexibility to their capital structure. European electric utilities have been among the biggest issuers - EDF issued the equivalent of EUR6.25bn in January 2013 and the equivalent of around EUR4bn in January 2014. Telecom companies, including Orange and Telefonica, have also been major issuers.

High oil prices in recent years have given major oil companies little reason to issue hybrids, and the last time there was a similar collapse in prices was in the wake of the 2007-2008 financial crisis, when there was no investor demand for riskier securities. In some cases that led European oil companies to boost leverage to maintain spending. Royal Dutch Shell, for example, increased its total debt by around USD11.8bn in 2009, which contributed to a downgrade of its rating.

But this time the low-interest-rate environment and investors' search for yield has created significant demand for hybrid bonds. This can be seen in the reported EUR20bn order book for Total's issues and the yields of 2.25% and 2.625% on its two hybrid bonds.

Fitch allocates 0%, 50% or 100% equity credit to hybrid securities depending on their ability to contribute to financial flexibility and support the ongoing viability of an organisation. Hybrid instruments typically need to be at least subordinated to senior debt and allow for consecutive deferral of interest payments for at least five years to receive equity credit. It is also essential for any equity allocation that the terms of the instrument avoid mandatory payments, covenant defaults, or events of default that could trigger a general corporate default or liquidity need.