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Rating Action:

Moody's affirms RWE Baa3 senior, Ba2 hybrid ratings; multiple outlooks

03 Nov 2016

London, 03 November 2016 -- Moody's Investors Service has today affirmed the senior long- and short-term Baa3/P-3 ratings of German utility, RWE AG (RWE) and the Ba2 rating for its Subordinated Hybrid Capital Securities (the hybrid notes), following the sale of around 23% of the shares in RWE's subsidiary, innogy SE (innogy).

The outlook on the senior bonds (or senior debt) of RWE AG, innogy Finance B.V. and innogy Finance II B.V. under the guarantee of RWE AG remains stable.

At the same time, Moody's has changed the outlook to negative from stable on the EMTN programme of RWE and on the hybrid notes.

RATINGS RATIONALE

-- AFFIRMATION OF RWE'S Baa3/P-3 SENIOR, Ba2 HYBRID RATNGS

The affirmation of the ratings of the senior debt and hybrid notes reflects Moody's view that (1) the credit quality of the RWE group; and (2) the hybrid notes' positioning relative to the senior debt at RWE is unchanged, following the sale by RWE of 23% of its shares in innogy.

Moody's considers that the share sale has not altered the consolidated credit quality of the RWE group because the divestment and future cash leakage to minority shareholders is offset by the sale proceeds. EUR2 billion of the primary proceeds will be retained within innogy and is likely to be dedicated towards investments, while RWE will retain EUR2.6 billion to add to its financial flexibility.

The rating agency notes that RWE and innogy have entered into "an agreement on basic principles", which sets out an intention to manage the companies independently of each other such that both can pursue their own strategic, operating and financial targets. Nonetheless, Moody's also notes that RWE continues to enjoy significant control through its 77% stake in innogy and its associated shareholder rights -- such as control over dividend policy and other capital and management decisions -- that it may exercise, in extremis, to support the financial obligations at the parent.

The ratings' affirmation also takes into account the RWE group's continuing scale, diversity and leading business positions along the "energy value" chain in many markets and strategy to defend its financial profile, including a significant reduction in net financial debt (excluding adjustments for nuclear and pension provisions) in recent years. The group will further benefit from an increasing proportion of earnings from regulated and contracted activities at innogy as increasing investments generate income. RWE will, nonetheless, remain exposed to higher risk activities through its large generation and trading portfolio. Earnings will continue to be affected by volatile power prices, which still remain low compared with historic levels, despite the recent rebound in commodity prices.

Moody's notes that RWE has indicated that it may continue to monetise further stakes in innogy (up to a potential 49% sell down). Sale proceeds will bolster RWE's financial flexibility and ability to meet its residual debt and other obligations (pension, nuclear and mining decommissioning obligations) but at the expense of future dividend income and a large share of relatively lower risk assets at innogy. In this context, RWE's future strategy, which is yet to be announced, will become increasingly important in determining the company's credit quality.

RATIONALE FOR STABLE OUTLOOK

-- SENIOR BONDS

The stable outlook on the senior debt reflects RWE's intention that, in due course, it will seek to further reorganise its senior debt, transferring full liability to innogy. This debt is currently issued directly through RWE or indirectly through innogy Finance B.V. and innogy Finance II B.V., under the guarantee of RWE. If successful, innogy will replace RWE, either directly as issuer, or as guarantor.

Negative pressure could develop on any bonds, for which innogy does not become fully liable, for the reasons described below.

RATIONALE FOR THE NEGATIVE OUTLOOK

-- EMTN PROGRAMME

Moody's does not believe that RWE is likely to make any new issuance under the existing programme during the expected transfer process of the senior bonds. The negative outlook nonetheless indicates that any senior debt, or existing or updated debt programmes, that remain at RWE, could come under negative pressure because they will be structurally subordinate to any debt obligations at innogy and will rank behind its minority shareholders. RWE will also hold the riskier generation and trading assets. The short-term Prime-3 debt rating could also come under negative pressure for similar reasons.

WHAT COULD MOVE THE RATINGS UP/DOWN

The outlook could be stabilised if Moody's view on (1) the consolidated credit strength of the RWE group; and/or (2) the evolution of the stand-alone credit quality of RWE, on further clarification of RWE's strategy, were to improve such as to justify the maintenance of a Baa3 rating at RWE.

Moody's view of the consolidated credit strength of the RWE group could improve if (1) group financial metrics were to sustainably increase above those indicated for the current Baa3 rating of FFO/net debt of low-mid teens and RCF/net debt of low double digits/low teens, in percentage terms and/or (2) the rating agency's view of the operating risks, or the extent to which RWE is exposed to them, were to be reduced. These could relate to the power price environment and/or political and legislative risks. Our view could also be affected, ether negatively or positively, by RWE's strategy, once determined.

Should the negative pressure described under the outlook materialise, then this ratings pressure could potentially result in a downgrade, any such downgrade is likely to be limited to one notch.

Negative pressure could also develop if our view of (1) the consolidated credit quality of the group were to weaken, potentially as a result of group metrics falling consistently below the guidance indicated for the current Baa3; and/or (2) operating, political or regulatory risks were to increase; and/or (2) the standalone credit quality of RWE were to weaken (see later).

-- HYBRID NOTES

The negative outlook on the hybrid notes reflects RWE's intention to keep them at the RWE level. It therefore takes into account (1) that these notes will also be structurally, as well as contractually, subordinate to senior obligations within the group; (2) uncertainty over RWE's future strategy including the hybrids' positioning within the future capital structure of the company, which may include senior debt; and (3) the evolution of RWE's standalone credit quality, which may weaken (as described below), and weigh on cash flows available to service the hybrid or affect recovery in a default scenario.

While RWE maintains a significant majority stake in innogy, Moody's will focus on the consolidated credit quality of the group in determining ratings at RWE (and innogy). Nonetheless, Moody's recognises that the two companies will develop increasingly divergent strategies.

At the RWE level, Moody's focus will increasingly shift to RWE's standalone credit quality, as and when its stake in innogy declines, and as its strategy, which is yet to be announced, is determined. This assessment will include (1) its exposure to higher risk generation and trading assets and the evolution of their operating environment; (2) its proposed capital structure and financial objectives; (3) the prospects for its existing businesses and potential future investments; (4) likely dividend income from innogy; and (5) the success of RWE in utilising potential future share sale proceeds to offset the loss of income from innogy, and hence maintain credit quality. As such, the positioning of the hybrid notes is likely to become increasingly influenced by its position in relation to that of any senior debt ratings at RWE, rather than those at innogy.

Any ratings at innogy will continue to reflect the consolidated credit strength of the group. innogy has a better business mix profile, but Moody's assessment of its credit quality will take into account that of the broader group and RWE's majority ownership, and as yet, innogy has no track record of independent operations. As and when RWE sells down further stakes in innogy and as innogy's management establishes such a track record, Moody's may begin to delink its view of the relative credit quality of the two entities. Such a view is likely to reflect positively the lower business risk profile of innogy, with its emphasis on regulated and contracted businesses, as well as its exposure to growing energy services and supply.

WHAT COULD MOVE THE RATINGS UP/DOWN

The outlook on the hybrid notes could be changed to stable, if (1) RWE's current capital structure and high level of ownership in innogy were to be maintained, although this is not anticipated; and/or (2) further subordination of the hybrid instruments (to senior debt and increasing minority interests at RWE), were to be mitigated by a strengthening of the standalone credit quality of RWE, such as through a significant reduction in its debt and other obligations and/or through an improvement in its business risk profile.

The rating could be downgraded if potential increasing subordination of the hybrid notes and growing distance from the relatively stable and predictable cashflows at innogy were not mitigated by an improvement in the credit quality of RWE.

The following rating actions were taken:

Affirmations:

..Issuer: RWE AG

....Subordinate Regular Bond/Debenture, Affirmed at Ba2

....Senior Unsecured Medium-Term Note Program, Affirmed at (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed at Baa3

....Commercial Paper, Affirmed at P-3

....Other Short Term, Affirmed at (P)P-3

..Issuer: innogy Finance B.V.

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed at (P)Baa3

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed at Baa3

....BACKED Other Short Term, Affirmed at (P)P-3

..Issuer: innogy Finance II B.V.

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed at Baa3

Outlook Actions:

..Issuer: RWE AG

....Outlook, Changed To Negative(m) From Stable

..Issuer: innogy Finance B.V.

....Outlook, Changed To Stable(m) From Stable

..Issuer: innogy Finance II B.V.

....Outlook, Assigned Stable

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Francis
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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