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Contact Energy, parent Origin mull redemption of $2.03 bln of notes after S and P change

Wednesday 3rd April 2013

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Contact Energy and Australian parent Origin Energy are mulling whether to redeem some $2.03 billion of hybrid notes after Standard & Poor's changed its criteria for assessing the equity content of such instruments.

Hybrid securities typically have characteristics of both debt and equity and S&P's revisions relate specifically to those currently eligible to be classified as having high (up to 100 percent) equity content. Such changes affect the ratio of debt to equity on a company's balance sheet and potentially threaten its credit rating.

Under S&P's criteria, to qualify as a high equity content instrument, a company must be willing to impose losses on investors in times of stress, they should be subordinate to conventional debt, and/or mandatorily convertible to stock, or held strategically by a group entity of a government.

Contact said the change affects its $200 million of 2024 capital bonds, which will no longer qualify as high equity content. The power company is mulling whether to exercise its early redemption rights because of the change, which qualifies as a rating event under the terms of the bonds.

The change also affects A$900 million of Origin's ASX-traded subordinated notes due in 2071 and 500 million euros of LSE-traded capital securities due in 2071. Origin said it will decide whether to redeem the securities once the changes are confirmed with S&P.

The changes will potentially have a greater impact on Australian oil company Santos, whose 1 billion euros of hybrid securities issued in September 2010 are to be reclassified as debt. S&P has put Santos' BBB+ credit rating on CreditWatch with negative implications.

Santos chief financial officer Andrew Seaton said the company was "very disappointed with S&P's decision" which imposes the revised criteria retrospectively and is "inconsistent with the detailed consultation and review undertaken with S&P in 2010 to ensure the terms and conditions of the hybrid met S&P's criteria for 100 percent equity classification."

The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.

Australian gaming group Tabcorp Holdings also had its BBB rating put on CreditWatch with negative implications after the change reduced the equity content on various of its hybrid securities to intermediate (50 percent equity) from high (100 percent).

As a result it has entered into an agreement to underwrite its dividend reinvestment plan to 50 percent for the next two dividends. While it would have the right to redeem the securities, it doesn't plan to, the company said yesterday.

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