Hybrid Issuers Waive Call Rights to Regain S&P Equity Credit

  • Companies act after S&P changes treatment of 29 hybrid bonds
  • Rating firm's move is `frustrating,' Dong Energy official says

Dong Energy A/S, Vattenfall AB and Alliander NV said they’ll waive certain rights to redeem hybrid bonds after Standard & Poor’s sent shockwaves through the market by deciding it will no longer count part of some notes as equity.

“We think we have done what’s required and now we hope that S&P can re-establish the equity content,” Kristian Borbos, Dong’s lead investor relations manager said. S&P’s change “is a bit frustrating from our point of view as an issuer, because they signed off on something six months ago and now all of a sudden they say that they don’t like this particular clause.”

Other issuers have also begun looking at changes after S&P last month started treating about $23 billion of hybrid notes purely as debt following a review that showed the bonds may provide less of a cushion for senior creditors than previously assumed. Hybrid notes have been popular with issuers because ratings firms typically count part of the bonds as equity, reducing their assessment of a borrower’s indebtedness.

The waived redemption rights “should result in the restoration of equity credit for Vattenfall and Dong,” Andrew Moulder, an analyst at CreditSights, wrote in a note before Alliander’s announcement. “We expect most of the other companies will use a similar method to mitigate the S&P change.”

Economic Stress

S&P altered its treatment of 29 notes worldwide because issuers could call them even when under economic stress. The new treatment may deter issuance and rattle market confidence, analysts at Barclays Plc and Mitsubishi UFJ Securities International Plc said at the time.

The rating company removed equity credit from 600 million euros ($645 million) of hybrid notes sold by Danish power producer Dong in April. The change affected about 1.6 billion euros of notes denominated in Swedish kronor and euros at Vattenfall, a Swedish utility.

Alliander’s waiver applies to 500 million euros of perpetual notes, the Dutch utility said in a statement.

S&P spokesman Russell Gerry said the company is examining information from the issuers and declined to comment further.

Telefonica SA is reviewing documentation with lawyers, considering options and talking to S&P, the Spanish telecommunications provider’s Chief Financial Officer Angel Vila said on a call with investors last week.

SSE Plc, the U.K.’s second-biggest energy supplier, said last month that it was considering options including “amendments to the changing terms of the securities.” Centrica Plc, the nation’s biggest energy supplier, said it may investigate ways to restore the equity credit.

RWE AG has also said it’s talking to S&P about the issue. The reclassification was “very strange” as S&P reviewed the notes a few months earlier, the German power producer’s Chief Financial Officer Bernhard Guenther said in a statement last month. “Such erratic behavior destroys investor and issuer confidence.”

Merck KGaA, Europe’s oldest drugmaker, is also in discussions with S&P and evaluating potential measures to regain the equity credit, said Rando Bruns, head of group treasury.

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