W Upgraded to P-2(low) by S&P Following Parent Merger; DBRS Stands Pat

Enbridge Inc. has announced:

the completion today of the previously announced stock-for-stock merger transaction (the Transaction) to acquire all of the outstanding common stock of Spectra Energy Corp (NYSE:SE) (Spectra Energy).

This led Standard & Poor’s to announce:

  • •On Feb. 27, 2017, Enbridge Inc. announced the completion of its merger with Spectra Energy Corp. in a share-exchange transaction.
  • •With the merger’s completion, Spectra subsidiary Westcoast Energy Inc. will become a wholly owned subsidiary of Enbridge Inc.
  • •We view Westcoast as a core subsidiary of Enbridge, so we are raising our ratings on Westcoast, including our long-term corporate credit rating to ‘BBB+’ from ‘BBB’.
  • •We removed the ratings from CreditWatch, where they were placed with positive implications Sept. 6, 2016.
  • •The stable outlook on Westcoast reflects the outlook on ultimate parent Enbridge.

…
S&P Global Ratings today said it raised its ratings on Westcoast Energy Inc., including its long-term corporate credit and senior unsecured debt ratings on the company to ‘BBB+’ from ‘BBB’. S&P Global Ratings removed the ratings from CreditWatch, where they were placed with positive implications Sept. 6, 2016. The outlook is stable.

Enbridge Inc. has announced its merger with Spectra Energy Corp., under which Spectra and all its subsidiaries, including Westcoast, will merge with Enbridge at the closing of this share-exchange transaction.
…
The stable outlook on Westcoast reflects the outlook on parent Enbridge,
because we view Westcoast to be a core subsidiary under our criteria, so have
linked the ratings and outlooks on the two.

The stable outlook on Enbridge reflects our view that the transaction with Spectra will not result in material asset dispositions that do not repay debt, or changes in proposed financing for the combined capital program that increase the proportion of debt. In addition, we expect that the planned capital program will occur on time and budget, and that the financing plans will maintain adjusted funds from operations (AFFO)-to-debt at the low end of the significant financial risk profile category at about 14%.

The new S&P rating for the Westcoast preferreds, W.PR.H, W.PR.J, W.PR.K and W.PR.M, is now P-2(low), up a notch (but an important notch!) from P-3(high).

DBRS commented on the merger:

DBRS continues to believe that the merger does not have any impact on the credit quality of Spectra and its DBRS-rated subsidiaries as no changes are currently contemplated to Spectra, its subsidiaries and counterparties, as a result of the Transaction. As a result, the stand-alone credit profiles of Spectra and its DBRS-rated subsidiaries remain unchanged.

With respect to Enbridge, DBRS confirmed all ratings:

DBRS Limited (DBRS) has today confirmed the following ratings of Enbridge Inc. (ENB) and removed them from Under Review with Developing Implications where they were placed on September 6, 2016. The trends are Stable:

— ENB, Issuer Rating of BBB (high)
— ENB, Medium-Term Notes & Unsecured Debentures rated BBB (high)
— ENB, Cumulative Redeemable Preferred Shares rated Pfd-3 (high)
— ENB, Commercial Paper rated R-2 (high)
…
With respect to financial risk profile, DBRS expects ENB to meet its key target metrics of 15% funds from operations (FFO) to debt and five times debt-to-EBITDA, likely in late 2018 or early 2019. DBRS notes the combined entity’s substantial medium-term capex program and consequently expects near-term pressure on ENB’s credit metrics to continue. DBRS expects the recovery in key credit metrics (on both consolidated and non-consolidated bases) at the combined entity to be faster than previously expected from ENB on a stand-alone basis. This expectation is consistent with a number of key DBRS assumptions, including the migration of the combined entity’s common dividend payout ratio toward the low end of the 50% to 60% range over the medium term, the achievement of expected run-rate synergies and estimated tax savings, and that there is no increase in structural subordination at the ENB level from currently contemplated levels.

The Stable trends incorporate DBRS’s expectation that any incremental investments in new projects will be consistent with maintaining a strong overall business risk profile and medium-term improvement in key credit metrics. Changes to any of these and other key assumptions would cause DBRS to revisit the current ratings and/or trends.

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4 Responses to “W Upgraded to P-2(low) by S&P Following Parent Merger; DBRS Stands Pat”

  1. skeptical says:
    November 19, 2018 at 1:28 am

    Question:
    How can Westcoast Energy, which is essentially a subsidiary of Enbridge now, have a higher credit rating than the parent?
    ENB preferreds are at P3H, while westcoast are at P2L. Westcoast used to be P3H, but after the acquisition, it moved up to P2L. How does it work. Parent is unaffected, but child gets better rating even though it belongs to a weaker parent.

  2. jiHymas says:
    November 19, 2018 at 5:33 pm

    How can Westcoast Energy, which is essentially a subsidiary of Enbridge now, have a higher credit rating than the parent?

    This is actually fairly common, due to a phenomenon called “structural subordination”.

    If we look at the DBRS August affirmation of W, we see:

    The principal methodologies are … and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies.

    If we then look up DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, we find:

    An important issue in the context of a holdco/opco corporate structure is the concept of structural subordination. In cases where both the opco and the holdco have issued debt, in the absence of any mitigating factors (typically upstream guarantees from the opco), holdco debt effectively ranks behind the debt at the opco (i.e., it is structurally subordinated). Holdco debtholders have recourse to the assets and cash flow of the opco only after opco debt obligations have been satisfied, at which time excess amounts, if any, become available to the equity holders of opco (i.e., holdco), typically in the form of upstream dividend payments from opco to holdco. The presence of a guarantee from the opco to the holdco would put holdco creditors at the same ranking as unsecured creditors of opco (assuming the guarantee is granted on an unsecured basis). Holdco lenders would, in this case, be subordinate to any secured creditors of opco, but would nonetheless rank ahead of the equity interests of opco.

    Every case is different – for instance, BAM has a higher rating than most of its subsidiaries – so you have to review the ratings releases carefully.

    One occasion on which this became important – although not for reasons of actual default – was the exchange of new BCE preferreds for old Bell preferreds. Shareholders had cause to regret this loss of credit quality as BCE’s credit rating declined.

  3. skeptical says:
    November 19, 2018 at 6:20 pm

    Thanks for the explanation and the great link to the DBRS paper.

    In cases where both the opco and the holdco have issued debt, in the absence of any mitigating factors (typically upstream guarantees from the opco), holdco debt effectively ranks behind the debt at the opco (i.e., it is structurally subordinated).

    So assuming the above also applies to Insurance companies, does it mean that POW and PWF will be subordinated to GWO’s debt and/or preferreds?

  4. jiHymas says:
    November 19, 2018 at 8:22 pm

    So assuming the above also applies to Insurance companies, does it mean that POW and PWF will be subordinated to GWO’s debt and/or preferreds?

    That is correct and in fact you can see that GWO’s main subsidiary, GWL has a higher rating than its parent. However, PWF has the same DBRS rating as GWO:

    GWO, a large insurance organization that contributes approximately 74% of PWF’s year-to-date 2017 earnings, is the largest contributor to the Company’s earnings and overall strength. Hence the primary methodology used to rate GWO, the Global Insurance Methodology, is also the primary methodology used to rate PWF. The diversification and overall strength of the Company’s combined subsidiaries, in addition to the assessment of the financial strength of the PWF legal entity, have prompted DBRS to conclude that the sum of the parts is sufficiently strong enough for the PWF Issuer Rating to be at the same level as GWO’s.

    But:

    The ratings for POW are one notch below PWF’s ratings under the holding company criteria because of structural subordination. Additionally, PWF’s Issuer Rating has been set at the same level as GWO’s Issuer Rating of A (high). For more information, see the press releases “DBRS Confirms Ratings of Power Financial Corporation at A (high) and Pfd-2 (high)” published on November 29, 2017, and “DBRS Confirms Ratings of Great-West Lifeco Inc. and Affiliates” published on November 20, 2017.

    The same relative notching is applied by S&P.

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