TEXT-Fitch cuts some Spanish utilities on sovereign action

Fri Jun 8, 2012 

(Reuters) For both Enagas and Red Electrica, the limit of cushion above their sovereign ratings has now been exceeded, and their IDRs have consequently been downgraded, by two notches and one notch, respectively

IMPACT OF SOVEREIGN RATINGS ON UTILITY DEBT INSTRUMENTS

While no further IDRs are changed as a result of the Spanish downgrade, a number of debt instrument ratings have been affected.

The additional notch above the IDR applied to the debt instruments of utilities with a large portion of regulated income, reflecting higher anticipated recoveries in the event of default, is not applied if that uplift would exceed the sovereign's foreign currency ratings. Instead, the senior unsecured debt rating is re-aligned with the utilities' IDR. Fitch believes that the traditionally higher rates of recovery for utilities' debt are less predictable in a distressed sovereign environment than in the case of an idiosyncratic default of a single utility.

This reduction also applies to subordinated instruments which although not rated at the level of the sovereign foreign currency rating, would also see the presumption of higher recoveries in case of default removed, and which are thus also subject to downgrade.

The Spanish sovereign downgrade has thus affected the bond ratings of two further utility groups - Iberdrola S.A. and Gas Natural SDG, S.A.. For Iberdrola's UK subsidiary, Scottish Power UK, its recovery is based on the UK utility regulatory framework, which is not adversely affected by the Spanish sovereign rating action. Details of all bond actions are listed below.

MAINTAINED RATING WATCH NEGATIVE (RWN) FOR MAJORITY OF UTILITIES WITH SPANISH EXPOSURE

Separately from the Spanish sovereign action, the ratings of utilities with material exposure to Spain have been maintained on RWN, where they were placed in April 2012, as Fitch reviews the impact of measures adopted (and pending adoption) by the Spanish government which adversely affect Spanish utilities remuneration and, more generally, the degree to which political interference fundamentally weakens the predictability of Spanish utilities' cash flows and economic regulation framework. This includes, among others, Endesa, S.A.'s IDR and senior unsecured ratings which remain aligned to those of its Italian parent company Enel S.p.A , currently at 'A-' on RWN.

The exceptions to the RWN are Enagas and Red Electrica, whose ratings have been removed from RWN and their Long-term IDRs assigned a Negative Outlook. The Negative Outlook matches that on the sovereign rating and indicates downside rating potential in the event of a further sovereign downgrade of one notch or more. Fitch assumes that pending regulatory measures to be adopted in Spain are unlikely to affect the current ratings of these transmission companies which are now constrained by the sovereign rating.

For more details, please see "Fitch Places Utilities With Sizeable Exposure to Spain on RWN" dated 3 April 2012. Fitch intends to resolve the RWNs before the end of July.

RATING ACTIONS

-- Issuer Ratings

Enagas, S.A.

Long-term IDR downgraded to 'A-' from 'A+', removed from RWN, Negative Outlook

Short-term IDR downgraded to 'F2' from 'F1', removed from RWN

Senior unsecured rating downgraded to 'A-' from 'A+', removed from RWN

Red Electrica Corporacion, S.A.

Long-term IDR downgraded to 'A-' from 'A', removed from RWN, Negative Outlook

Short-term IDR downgraded to 'F2' from 'F1', removed from RWN

Senior unsecured rating downgraded to 'A-' from 'A', removed from RWN

-- Senior Unsecured Debt Rating Downgrades:

Iberdrola, S.A.

Long-term IDR at 'A-' maintained on RWN

Short-term IDR at 'F2' maintained on RWN

Senior unsecured rating downgraded to 'A-', maintained on RWN, from 'A'

National Long-term rating at 'AAA (mex)' maintained on RWN

Iberdrola International, BV

Senior unsecured rating downgraded to 'A-' from 'A', maintained on RWN

Commercial Paper rating at 'F2' maintained on RWN

Iberdrola Finanzas, S.A.U.

Senior unsecured rating downgraded to 'A-' from 'A', maintained on RWN

National Long-term rating at 'AAA (mex)' maintained on RWN

Iberdrola Finance Ireland Limited

Senior unsecured rating downgraded to 'A-' from 'A', maintained on RWN

Scottish Power Limited

Long-term IDR at 'A-' maintained on RWN

Short-term IDR at 'F2' maintained on RWN

Senior unsecured rating at 'A-' maintained on RWN

Scottish Power Limited's ratings are equalised with the ratings of its Spanish parent Iberdrola, S.A.

Scottish Power UK

Long-term IDR at 'A-' maintained on RWN

Short-term IDR at 'F2' maintained on RWN

Senior unsecured rating at 'A' maintained on RWN

Scottish Power UK's IDRs are capped by the ratings of Iberdrola, S.A.

Gas Natural SDG, S.A.

Long-term IDR at 'A-' maintained on RWN

Short-term IDR at 'F2' maintained on RWN

Gas Natural Finance BV

Senior unsecured rating downgraded to 'A-' from 'A', maintained on RWN

Euro commercial paper programme at 'F2' maintained on RWN

Gas Natural Capital Markets, S.A.

Senior unsecured rating downgraded to 'A- from 'A', maintained on RWN

Union Fenosa Finance B.V.

Commercial paper at 'F2' maintained on RWN

Union Fenosa Financial Services USA LLC

Subordinated debt rating downgraded to 'BBB-' from 'BBB', maintained on RWN

Union Fenosa Preferentes, S.A.

Subordinated debt rating downgraded to BB+' from 'BBB-', maintained on RWN

The following Spanish corporate ratings are unchanged following the sovereign downgrade:

Abengoa S.A

Cableuropa S.A./ONO Finance Plc.

Endesa S.A.

Ferrovial, S.A.

Hidroelectrica del Cantabrico - Hidroelectrica

Obrascon Huarte Lain SA (OHL) S.A.

Repsol YPF S.A.

Telefonica SA

FURTHER INFORMATION

Investors are encouraged to consult Fitch's broader eurozone corporate commentary for context on today's actions and for guidance on rating sensitivity to a variety of sovereign rating scenarios. Links to reports on this topic are included below.