Fitch Rates National Grid Gas Finance plc's Future Notes 'A(EXP)'/RWN
The expected rating reflects that any instruments issued under MTN programme will initially be guaranteed by National Grid Gas plc (NGG, Long-Term Issuer Default Rating (IDR) A-/Stable, senior unsecured rating A). The draft terms and conditions of the programme state that the initial guarantor will be substituted by the successor guarantor, National Grid Gas Distribution Limited (NGGD), once NGG's gas distribution business has been transferred to NGGD.
The RWN reflects the scope for downgrading the instrument rating by one notch upon guarantor substitution as we assess NGGD's credit quality to be below that of NGG, based on the expected template gearing of net debt to regulatory asset value (RAV) at 65%.
KEY RATING DRIVERS
The future notes' expected rating reflects the credit quality of the initial guarantor, NGG. The RWN indicates that the successor guarantor's credit quality, NGGD, is likely to be lower. This is based on our assessment of NGGD's expected credit profile. We expect to downgrade the rating by one notch at the point of guarantor substitution to NGGD.
Our assessment of NGGD's expected credit profile incorporates the combination of the strong business profile due to the fully regulated nature of the four UK gas distribution networks and a target gearing of 65% net debt to RAV. We view positively additional creditor protection in the draft MTN programme prospectus stating net debt to RAV ratio exceeding 70% as an event of default upon guarantor substitution.
NGGD is a newly created 100% subsidiary of National Grid Holdings One plc, wholly owned by National Grid plc (Long-Term IDR BBB/Stable). It was created for the purpose of receiving regulated gas distribution assets from NGG and subsequent 51% stake sale to a third party acquirer (sale announced in November 2015, for details see 'Fitch: No Impact on National Grid's Ratings from Proposed Gas DNOs Sale'). The new notes will become a permanent part of NGGD's capital structure once the hive out of gas distribution assets from NGG is completed. We assume that the 65% target gearing will remain in place after the majority ownership of NGGD changes, expected in early 2017.
We assume NGGD's gearing to be 65% net debt to RAV in the long term.
The RWN reflects the scope for downgrading the rating upon guarantor substitution from NGG to NGGD. We expect to downgrade the rating by one notch at the point of guarantor substitution. This is conditional on the satisfaction of a number of requirements, including transfer of gas distribution assets and gas transporter license from NGG to NGGD, NGGF becoming a wholly-owned subsidiary of NGGD and NGGD obtaining at least an investment grade rating.