Dong Energy Promises to Fix Hybrid Bond Shock After S&P Strikes

  • The Danish company says S&P move won't affect its IPO plans
  • S&P put Dong in a similar position in 2013 with hybrid notes

Dong Energy, a utility being readied for an initial public offering by the Danish state, says it’s working on addressing concerns raised by Standard & Poor’s on the loss-absorbing characteristics of a hybrid bond.

S&P on Tuesday wiped out the equity content of Dong’s 600 million euro ($662 million) hybrid note, lowering it to “minimal” from “intermediate.” The Danish company had been using 50 percent of the security in its equity buffer until the downgrade, which it said followed S&P’s misgivings over the terms for a call option. S&P took similar steps with Swedish utility Vattenfall, which lost the equity content in two 3 billion-krona ($353 million) hybrid notes and one hybrid at 1 billion euros.

“We are working on finding a solution as soon as possible,” Kristian Borbos, Dong’s lead Investor Relations manager, said in a phone interview. “It’s complicated when a rating agency changes its opinion, and even an opinion that it only six months earlier had confirmed.”

Danske Bank says the S&P move will probably prompt both Dong and Vattenfall to make adjustments to their hybrid terms, but that the two will also work to please investors.

“Both Dong Energy and Vattenfall will have an incentive to seek to change the prospectus to re-qualify for equity treatment with S&P,” Danske said in a note. “This could entail some sort of a sweetener to current hybrid owners. Subsequently, we view this as slightly credit positive for hybrid owners but mildly credit negative for senior unsecured investors.”

Dong, which found itself in a similar situation in 2013, doesn’t expect the downgrade to interfere with its IPO plans.

The company in 2013 forced creditors to swap into a new hybrid note after S&P made an existing security unusable as equity in its loss-absorbing buffers. Back then Dong said it had worked closely with the rating company to ensure the new hybrid would be viewed as having a 50 percent equity content.

Dong’s 3015 hybrid note was given a BB+ credit grade by S&P in April. The rating company said then that an intermediate equity content was warranted because “the notes meet our criteria in terms of permanence, deferability at the company’s discretion, and subordination.”

Dong said S&P’s decision to alter that assessment now is hard to understand.

“I’d say we’ve had some surprises,” Borbos said.

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