Fitch: Early Refinancing Should Not Reduce Hybrid Equity Credit <Origin Href="QuoteRef">CELR.PA</Origin>

(The following statement was released by the rating agency)

FRANKFURT/LONDON, March 12 (Fitch) Early refinancing or redemption of a hybrid 
instrument will generally not affect the equity credit Fitch Ratings gives to a 
replacement instrument unless we believe the issuer's commitment to a specific 
capital structure has weakened. We have received a high number of inquiries 
about how we view these issues in the weeks since ArcelorMittal's decision to 
repay a hybrid around 18 months after it was issued.

Hybrid instruments attract 0%, 50% or 100% equity credit under our methodology. 
For an instrument to qualify for any equity credit, the issuer must be freely 
able to defer coupons and there must be a remaining effective maturity of at 
least five years. Effective maturity is generally the date at which the 
instrument is most likely to be refinanced.

The five-year threshold shows a commitment by the issuer to a certain capital 
structure. But a hybrid instrument is just one of several ways to achieve a 
particular structure, and many companies actively manage their capital 
structure. Similarly, issuers can buy back shares, and we do not discount the 
remaining equity on those grounds.

Our methodology therefore does not treat hybrid capital as an unchanging 
instrument in the capital structure, but recognises that it is a funding 
instrument. We will not consider call dates that relate to certain events, such 
as changes to tax or rating agency treatment of hybrid securities, as effective 
maturities and they are not detrimental to equity credit. This acknowledges 
issuers' need to manage their capital structures and adapt to changing 
circumstances.

Circumstances may also make an earlier-than-anticipated refinancing of the 
hybrid instrument a sensible choice. The equity credit we assign to a subsequent 
instrument in such cases will be based on the methodology and generally will not 
be reduced unless we believe an issuer's management of hybrid instruments has 
become generally short term.

Alternatively, if an issuer's capital structure strengthened substantially after 
the issue of the hybrid and maintaining the instrument was no longer 
economically sensible, we would not view a decision to repay or redeem the 
instrument in itself as negative for the credit profile. We would review the 
impact on the IDR using our normal methodology.

Contact: 

Karsten Frankfurth

Senior Director

Corporates

+49 69 768 076 125

Fitch Deutschland GmbH

Taunusanlage 17

D-60325 Frankfurt am Main

Simon Kennedy

Director

Fitch Wire 

+44 20 3530 1387

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

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(Repeat for additional subscribers)

March 12 (Reuters) - (The following statement was released by the rating agency)

Early refinancing or redemption of a hybrid instrument will generally not affect the equity credit Fitch Ratings gives to a replacement instrument unless we believe the issuer's commitment to a specific capital structure has weakened. We have received a high number of inquiries about how we view these issues in the weeks since ArcelorMittal's decision to repay a hybrid around 18 months after it was issued.

Hybrid instruments attract 0%, 50% or 100% equity credit under our methodology. For an instrument to qualify for any equity credit, the issuer must be freely able to defer coupons and there must be a remaining effective maturity of at least five years. Effective maturity is generally the date at which the instrument is most likely to be refinanced.

The five-year threshold shows a commitment by the issuer to a certain capital structure. But a hybrid instrument is just one of several ways to achieve a particular structure, and many companies actively manage their capital structure. Similarly, issuers can buy back shares, and we do not discount the remaining equity on those grounds.

Our methodology therefore does not treat hybrid capital as an unchanging instrument in the capital structure, but recognises that it is a funding instrument. We will not consider call dates that relate to certain events, such as changes to tax or rating agency treatment of hybrid securities, as effective maturities and they are not detrimental to equity credit. This acknowledges issuers' need to manage their capital structures and adapt to changing circumstances.

Circumstances may also make an earlier-than-anticipated refinancing of the hybrid instrument a sensible choice. The equity credit we assign to a subsequent instrument in such cases will be based on the methodology and generally will not be reduced unless we believe an issuer's management of hybrid instruments has become generally short term.

Alternatively, if an issuer's capital structure strengthened substantially after the issue of the hybrid and maintaining the instrument was no longer economically sensible, we would not view a decision to repay or redeem the instrument in itself as negative for the credit profile. We would review the impact on the IDR using our normal methodology.

((Bangalore Ratings Team, Hotline: +91 80 6677 2513, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))

Keywords: Fitch: Early Refinancing Should Not Reduce Hybrid