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Rating action

Scope Ratings GmbH (Scope) has today assigned a BBB rating to subordinated (hybrid) debt issued by Terna - Rete Elettrica Nazionale SpA (Terna). All other ratings (A-/Stable issuer rating, A- senior unsecured debt rating and S-1 short-term debt rating) remain unchanged.

Rating rationale

The rating for subordinated (hybrid) debt stands two notches below Terna’s issuer rating. This is due to the features of the hybrid debt placed by the rated entity, primarily its deep contractual subordination (ranking ahead only of ordinary share capital), perpetual tenor and optional deferral (in whole or in part) on every coupon payment date at the discretion of the issuer.

Scope regards the inaugural placement of a subordinated and perpetual bond to qualify for a 50% equity credit in the computation of leverage and debt protection metrics. On 18 January 2022 Terna’s Board of Directors has authorised the issuance, by 30 June 2022, of one or more euro denominated, non-convertible, subordinated, hybrid, perpetual securities, for up to a maximum amount equal to EUR 1.25bn¹.

While Terna’s A-/Stable issuer rating is unaffected by the inaugural placement of subordinated (hybrid) debt, Scope underscores that the use of hybrid debt supports the issuer rating, which is constrained by moderate gearing amid the growing capex needs (EUR 8.9bn medium-term ‘Strategic Investment Plan’ for 2021-25). Scope highlights Terna’s strong commitment to strengthening its balance sheet if leverage were to approach a level that would weaken its credit profile. As such, the use of hybrid debt will clearly strengthen the balance sheet and widen the headroom against a potential negative rating action. Incorporating a 50% equity credit for hybrid debt, Scope expects Terna’s leverage – measured by Scope-adjusted debt/EBITDA – to remain within the 5-6x range commensurate with the issuer rating. Likewise, debt protection – measured by the EBITDA interest coverage – will likely remain solidly above 10x. Consequently, Scope is confident with the A-/Stable rating, whose rationale was updated on 24 November 2021. 

1. https://www.terna.it/en/media/press-releases/detail/board-directors-approves-potential-issue-hybrid-securities

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this Credit Rating, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Utilities, 18 March 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Rating: Olaf Tölke, Managing Director
The Subordinated Debt Credit Rating was first released by Scope Ratings on 1 February 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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