Keep your investors close
Times are tough in the financial markets but some companies are better placed than others to deal with credit problems. When investors fly to quality, E.ON is among the favoured destinations. The company is capitalising on its popularity among investors and trying to reach out to new groups to consolidate its position of strength. Solomon Teague finds out more.
In 2007 E.ON announced its funding program running up to 2010, by which time it plans to raise €30bn. It will be a herculean task, admitted Verena Volpert, senior vice president at E.ON, and in order to ensure lines of communication between investors and the company are kept open, it also created an investor relations department, comprising two people.
Last year E.ON borrowed €5.8bn via the bond markets in euros. The total amount outstanding under E.ON's debt issuance program was € 12.8bn end of December 2007. In September it raised €3.5bn in the Eurobond market in five and 10 year issues. It did a further tap of the euro benchmark bond 2017 tranche with €300m added in March 2008, taking the overall size of the issue from €3.5bn to €3.8bn.
In sterling it raised £1.5bn - £900m in 30 year paper and £600m in 12 year. Smaller sums have also been raised in Swiss francs in three and seven year tranches.
The utility is thinking about US dollar issuance but has not experimented with that yet, being less well known across the Atlantic than it is in Europe. A lot of preparation is needed for such an issue, Volpert noted, and so far the circumstances have not been right. Yen, Australian and Canadian dollar issues are among the new currencies being considered as a means to further diversify its investor base.
E.ON has looked to “test the water” in the euro commercial paper market, and in December last year had €1.8bn outstanding. “Commercial paper will be an important component of the funding program,” Volpert predicted.
Besides benchmark transactions, E.ON will also look at smaller deals of around €500m where opportunities arise. One example for this financing rope is a schuldschein – or ‘bondholder loan’ – a quintessentially German financing instrument marketed to domestic savings associations. A substantial amount will be raised through reverse enquiries, said Thomas Griesberger of E.ON’s corporate finance and creditor relations teams, in a number of smaller transactions worth €50m - €200m.
“We want to achieve flexibility through diversification, using as many different markets, instruments and currencies as possible,” said Volpert. “This is the best way to achieve funding certainty.”
E.ON also has the safety net of a syndicated loan agreement of €15bn in place, although this is a back-up facility E.ON does not intend to use.
E.ON’s financial strategy is to strictly adhere to a pre-defined capital structure, maintaining an A (or A2) rating with a debt target of three times EBITDA. It has been important to find the right balance in satisfying the conflicting wishes of bond holders and equity holders, noted Volpert: the former group want debt minimised while the latter want it maximised, as a higher proportion of debt means a higher return on equity. E.ON feels this level has achieved the best compromise: “A single A flat rating is good for bond holders but it allows the capital structure to be efficient enough,” explained Volpert.
A central part of the group’s financing strategy is that financing predominantly occurs at the group level, and not on a subsidiary level. “It’s a major principle for us,” Volpert said.
E.ON is confident about the future. “We have done OK since the crisis started,” Volpert said. “We have a good rating and utilities are popular with investors at times like this because they are seen as a safe haven. We have created our plans carefully to maintain flexibility. But there is no denying we are paying higher spreads than before the crisis. In our first issue after it started we issued a Eurobond – the five year tranche was priced at 60bps and the 10 year was 85bps. IFR said it had been a touch generous but we felt we were being pragmatic. We realised early the market wanted higher spreads, you have to be realistic.”
Timing is the key to success in the current market, Volpert added. “These days there are limited windows. When the market is there you have to move quickly. In the past people did deals when they wanted but it doesn’t work like that anymore.”
E.ON is also conducting a major share buyback program amounting to €7bn by the end of the year, half of which was completed last year. This has been conducted on an opportunistic basis with investors updated every Monday regarding any progress that has been made, said Griesberger.
The German group also has a €60bn investment program, intended to modernise its energy infrastructure and build up new market positions, particularly in power generation. Around €28bn is expected to be allocated this year, partly financed by asset swaps and existing liquid funds and company liquidity resulting from the operating cash flow. “We don’t want to be too precise about that at this stage because we need to maintain our flexibility,” said Volpert.