PTTEP's hybrid securities rated 2 notches below corporate ratings

 

The ratings are two notches below the rating agencies' respective corporate ratings for the company, which is owned 62 per cent by PTT and contributes over half of the national energy's earning. 

 

"This rating differential reflects the deeply subordinated nature of the hybrid debt as it ranks behind PTTEP's senior debt obligations in terms of the priority of claims. It also provides PTTEP with the option to defer coupons on a cumulative basis," said Simon Wong, a Moody's Vice President and Senior Analyst.

 

The lower hybrid rating also reflects Moody's view that hybrid securities

have a significantly higher loss potential rather than a materially 

higher default risk. To Moody's, the issuance of hybrid securities will help improve PTTEP's capital structure, strengthen its liquidity position and provide it with 

sufficient flexibility to meet upcoming capex needs and undertake small 

acquisitions in the future without jeopardizing its rating.

S&P considers the securities to have "intermediate" equity content, and will therefore classify 50% of the principal as debt and 50% of the distributions as interest expenses in our calculation of financial ratios. "We expect PTTEP to treat the securities as equity in its financial statements. Our assessment of the equity content and issue rating are subject to our review of the final issuance documentation."

The securities will pay a fixed distribution, reset every five years from 2018, and that payment will be based on the equivalent U.S. treasury rate to the next reset date plus an initial credit spread. The credit spread above the treasury rate will step up by 25 basis points in 2023 and by an additional 75 basis points in 2038. The securities also have a limited number of additional issuer call rights linked to the occurrence of certain prescribed external events, such as a change in taxation and accounting, change in rating agency equity credit assessment, and a change of control.

PTTEP has the intention to replace the proposed perpetual securities with an instrument that has equal or greater equity content (except in limited circumstances) if the securities are called before 2038.

 

"We could lower our assessment of the equity content on the proposed subordinated perpetual capital securities as well as PTTEP's existing subordinated capital debentures to "minimal" from "intermediate" if the company indicates any deviation from its replacement intention. A "minimal" equity content means we would treat the full principal of the securities as debt and all the distributions as interest expenses," S&P said.