Paris, January 09, 2023 -- Moody's Investors Service ("Moody's") has today assigned Baa3 long-term ratings to the two junior subordinated Capital Securities (the "Hybrids") to be issued by ENEL S.p.A. ("Enel"). The size and completion of the Hybrids are subject to market conditions. The outlook is negative.
RATINGS RATIONALE
The Baa3 rating assigned to the Hybrids is two notches below Enel's senior unsecured rating of Baa1, reflecting the features of the Hybrids. They are very long-dated, deeply subordinated and Enel can opt to defer coupons on a cumulative basis. The rating is in line with those of the existing hybrid notes issued by the company.
In Moody's view, the Hybrids have equity-like features which allows them to receive basket "C" treatment (i.e. 50% equity and 50% debt) for financial leverage purposes. Please refer to Moody's Cross-Sector Rating Methodology "Hybrid Equity Credit" (September 2018) for further details.
As the Hybrids' rating is positioned relative to another rating of Enel, a change in either (1) Moody's relative notching practice; or (2) the senior unsecured rating of Enel could affect the Hybrids' rating.
Enel's Baa1 rating is underpinned by (1) its large scale and geographical diversification, which helps dampen earnings volatility; (2) stable earnings stemming from regulated networks and contracted generation, which account for around 70% of the group EBITDA; and (3) a solid financial profile, with funds from operations (FFO)/net debt likely to exceed 20% by 2023-24.
The rating also considers (1) the company's exposure to Italy (Italy, Government of, Baa3 negative), where Enel generates a substantial proportion of its earnings; (2) political and regulatory risks in some of the other countries where it operates, including Spain (Spain, Government of, Baa1 stable) and the lower-rated Brazil (Brazil, Government of, Ba2 stable); (3) the execution risks associated with the group's large capital spending programme of EUR37 billion for 2023-25; (4) a fixed dividend per share, which may somewhat constrain its financial flexibility; and (5) the substantial minority holdings in the group, which reduce retained cash flow (RCF) and add to complexity.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the negative outlook on Italy's Baa3 sovereign rating, reflecting the company's vulnerability to negative macroeconomic developments and links with the sovereign, given that a substantial portion of its earnings are generated in Italy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade is unlikely and would be contingent on an upgrade of the Italian government's rating. Any upgrade would also be subject to the group demonstrating significantly stronger financial metrics than we expect over the medium term.
The rating could be downgraded if (1) the group were not able to maintain a financial profile consistent with the guidance for the current rating, such that its FFO/net debt appeared likely to fall persistently below 20% or RCF/net debt below the low teens in percentage terms; or (2) the Government of Italy's rating were downgraded; or (3) the execution of the group's strategy of switching its business risk profile to lower-risk activities were challenged.
The methodologies used in these ratings were Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864, and Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Enel is the principal electric utility in Italy and is owned 23.6% by the Italian State. In 2021 it generated EBITDA of EUR19.2 billion.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
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Benjamin Leyre
VP - Senior Credit Officer
Infrastructure Finance Group
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Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
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