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Rating Action:

Moody's assigns Baa3 rating to Veolia Environnement's hybrid notes; stable outlook

14 Oct 2020

Paris, October 14, 2020 -- Moody's Investors Service, ("Moody's") has today assigned a Baa3 long-term rating to the Deeply Subordinated Fixed Rate Resettable Notes (the junior subordinated "Hybrid") to be issued by Veolia Environnement S.A. (Veolia). The rating outlook is stable. The size and completion of the Hybrid are subject to market conditions.

RATINGS RATIONALE

The Baa3 rating assigned to the Hybrid is two notches lower than Veolia's senior unsecured rating of Baa1, reflecting the features of the instrument. It is undated, deeply subordinated and Veolia can opt to defer coupons on a cumulative basis.

In Moody's view the Hybrid has equity-like features which allow it 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 Hybrid's rating is positioned relative to another rating of Veolia, a change in either (1) Moody's relative notching practice or (2) the senior unsecured rating of Veolia could affect the Hybrid's rating.

Veolia's Baa1 rating is underpinned by (1) its size and position as one of the largest groups in global environmental services, a sector supported by positive structural dynamics; (2) the diversification of its revenue base by business, contract type and geography; and (3) the relatively low risk profile of its water business, which accounted for 41% of 2019 revenue.

These positives are balanced by (1) Veolia's exposure to the macroeconomic cycle through its waste business, which accounted for 37% of revenue during the same period; and (2) the increasing proportion of short-term contracts with industrial clients in its revenue mix.

Moody's expects the proceeds from the Hybrid issuance to be used to partly finance the acquisition of a 29.9% stake in SUEZ (Baa1 stable) which closed on 6 October 2020.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Veolia's management will take appropriate measures to restore financial flexibility at the current rating level if the company is successful in acquiring the remaining share capital in SUEZ. It also factors in Moody's assumption that any potential deterioration in the company's business risk profile because of increased exposure to industrial clients could be offset by a further improvement in its credit metrics.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A rating upgrade is unlikely in the next two years given the current weak operating environment and the adverse impact on credit metrics of the SUEZ acquisition. In the longer term, upward pressure on the ratings could develop if Veolia were to achieve retained cash flow (RCF)/net debt approaching 20% on a sustained basis.

Veolia's ratings could be downgraded if credit metrics appear likely to remain on a sustained basis below Moody's guidance for the Baa1 rating, which includes funds from operations (FFO)/net debt of around 20%, RCF/net debt at least in the mid-teens in percentage terms and FFO interest cover above 4x, because of weaker-than-expected operating performance or increased investments.

The principal methodology used in this rating was Environmental Services and Waste Management Companies published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113573. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 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 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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

Celine Cherubin
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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