(The following statement was released by the rating agency)
LONDON/WARSAW, July 02 (Fitch) Fitch Ratings has assigned DONG Energy A/S's
proposed callable subordinated capital securities an expected rating of
'BBB-(EXP)'. The proposed securities qualify for 50% equity credit. The final
rating is contingent on the receipt of final documents conforming materially to
the preliminary documentation. A full list of DONG's ratings is at the end of
The expected rating for the proposed capital securities reflects the highly
subordinated nature of the notes, considered to have lower recovery prospects in
a liquidation or bankruptcy scenario. The equity credit reflects the structural
equity-like characteristics of the instruments including subordination, maturity
in excess of five years and deferrable interest coupon payments. Equity credit
is limited to 50% given the cumulative interest coupon, a feature considered
more debt-like in nature.
The notes' rating and assignment of equity credit are based on Fitch's hybrid
methodology, dated 12 December 2012 ('Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis' on www.fitchratings.com).
KEY RATING DRIVERS OF THE NOTES
Ratings Reflect Deep Subordination
The proposed notes have been notched down by two notches from DONG Energy's
Long-term Issuer Default Rating (IDR; BBB+/Negative) given their deep
subordination and consequently, the lower recovery prospects in a liquidation or
bankruptcy scenario relative to the senior obligations. The notes only rank
senior to the claims of equity shareholders.
Equity Treatment Given Equity-Like Features
The proposed securities qualify for 50% equity credit as they meet Fitch's
criteria with regards to deep subordination, remaining effective maturity of at
least five years, full discretion to defer coupons for at least five years and
limited events of default. These are key equity-like characteristics, affording
DONG Energy greater financial flexibility.
Effective Maturity Date 2038
While the proposed notes are due in 3013, Fitch deems the effective, remaining
maturity as 2038, in accordance with the agency's hybrid criteria. From this
date, the coupon step-up is within Fitch's aggregate threshold rate of 100bps,
but the issuer will no longer be subject to replacement language, which
discloses the company's intent to redeem the instrument at its call date with
the proceeds of a similar instrument or with equity. According to Fitch's
criteria, the equity credit of 50% would change to 0% five years before the
effective remaining maturity date. The issuer has the option to redeem the notes
on the first par call date in 2018 and on any coupon payment date thereafter.
Cumulative Coupon Limits Equity Treatment
The interest coupon deferrals are cumulative, which results in 50% equity
treatment and 50% debt treatment of the hybrid notes by Fitch. Despite the 50%
equity treatment, we treat coupon payments as 100% interest. The company will be
obliged to make a mandatory settlement of deferred interest payments under
certain circumstances, including the payment of a dividend. This is a feature
similar to debt-like securities and provides the company with reduced financial
KEY RATING DRIVERS FOR DONG ENERGY
The Outlook on DONG Energy is Negative due to Fitch's expectation that leverage
ratios may be stretched for the 'BBB+' rating level in 2013-14. The company
faces a challenging operating environment, including unfavourable clean spark
spreads and a severe compression of profit margins in its Energy Markets
division. Fitch also expects the company's capex to remain high during the
period due to investments in offshore wind and exploration and production (E&P)
oil and gas fields.
Proposed Equity Injection
DONG Energy's plan to raise additional equity of at least DKK6bn-DKK8bn (around
EUR0.8bn-EUR1.1bn) by the end of 2013 may help stabilise the Outlook. The equity
increase process seeks to raise additional equity from new and/or existing
shareholders and is supported by the company's majority shareholder, the Kingdom
of Denmark (AAA/Stable), which owns an 81% stake in the company.
Weakening Metrics in 2012
DONG Energy reported weak credit ratios for 2012, including funds from
operations (FFO) adjusted net leverage of 5.9x up from 3.2x in 2011, as FFO
declined by 40% and adjusted net debt increased by 23% during 2012. Fitch's
projections, based on a scenario that the company is largely successful in the
implementation of its 2013-14 Financial Action Plan, show FFO adjusted net
leverage decreasing to about 4.0x by 2014. A DKK6.0bn equity increase itself
would lower FFO adjusted net leverage by about 0.4x. The recent EUR700m hybrid
bond issue with 50% equity credit assigned by Fitch lowers DONG Energy's net
leverage ratio by about 0.2x. This is because the company's hybrid bonds due
3010, which were largely replaced by the new EUR700m issue had 0% equity credit
from Fitch, mainly due to a look-back provision included in the terms.
Ormen Lange Redetermination
DONG Energy has recently reported that its stake in the Ormen Lange gas field,
one of the company's major assets, has increased to 14.02% from 10.34% following
a redetermination process concluded by the Ormen Lange partners in June 2013.
The redetermination will have a positive impact on DONG Energy's EBITDA from
July 2013 (for instance additional EBITDA of about DKK1.5bn or about 12% in
2013). This is due to the company's higher share in the field's hydrocarbon
production and also the catch-up effect mainly affecting 2013-2015 regarding
additional production volumes from previous years. However, the redetermination
will also increase the company's net investments in 2013-2014 to DKK30bn from
DKK25bn-DKK30bn previously planned due to the catch-up effect.
Positive: Future developments that could lead to positive rating action include:
- A potential Outlook stabilisation not only depends on the company's equity
increase but also the progress of its 2013-14 Financial Action Plan. This
includes a DKK10bn non-core asset divestment programme, reduction of ownership
interests in core activities, restructuring of the company's Energy Markets
division and a cost-cutting plan. FFO net leverage below 4.0x on a sustained
basis could lead to Outlook stabilisation.
Negative: Future developments that could lead to negative rating action include:
- Failure to timely implement its efficiency and non-core divestment programmes.
- Failure to re-negotiate its gas contracts.
- Further deterioration in DONG Energy's operating environment (for instance
unfavourable changes to clean dark and spark spreads or the oil/gas spread).
- FFO net leverage above 4.25x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
DONG Energy's liquidity is adequate, with unrestricted cash and cash equivalents
of DKK2.0bn at end-Q113, in addition to DKK9.8bn of highly rated fixed-income
securities, which support financial flexibility. Committed revolving mid-term
credit facilities of DKK11.6bn remained undrawn at end-Q113. Undrawn committed
facilities increased to DKK16.7bn due to new facilities of EUR680m (DKK5.1bn)
signed in May 2013. Short-term debt totalled DKK7.1bn at end-Q113.
FULL LIST OF RATINGS
Long-term IDR of 'BBB+'; Outlook Negative
Senior unsecured rating of 'BBB+'
Subordinated capital securities' rating of 'BBB-'
Subordinated capital securities' expected rating of 'BBB-(EXP)' for proposed
+44 20 3530 1395
Arkadiusz Wicik, CFA
+48 22 338 6286
Fitch Polska S.A.
Josef Pospisil, CFA
+44 20 3530 1287
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Rating Methodology', dated 08 August 2012, and
'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' dated 12 December 2012, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
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