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Thursday, 14 December 2017

Stealth approach

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Some issuers make their presence felt by coming to the markets little and often, while others wait for the rarer stellar opportunities to make their name. EDF is one of the latter.

To see the full digital edition of the IFR Top 250 Borrowers Report 2014, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

Electricite de France Energy spent less than seven days in the debt markets last year, but the resulting deals showed real innovation.

On November 20 2013, EDF became the first corporate to price a benchmark-sized Green bond, raising €1.4bn and attracting orders of €2.8bn. And then between January 13 and January 20 2014, it printed a €9bn equivalent triple-currency, quadruple-tranche jumbo hybrid perpetual offering (including two Century bonds), attracting more than €36bn of orders across the tranches.

The execution of the deals was roundly lauded. The European hybrids from January paid record low subordination premiums for the time, 155bp–185bp over senior bonds – far tighter than the 220bp over seniors EDF achieved with its hybrids a year earlier. Concessions on the hybrids were also small at 10bp–15bp.

The average coupon of the fixed-rate senior US dollar deals – excluding the 100-year – was just 1.9%. EDF’s dividend yield, by contrast, stood at 4.922% at the time of the deals’ execution, according to Thomson Reuters data.

Its Green bond was similarly successful, securing a concession against EDF’s outstanding euro curve of just 13bp and printing a coupon of 2.25%.

Investors told IFR that all of EDF’s deals had been priced attractively. “EDF dominated the hybrid market for us, the spread pick-up over seniors was really good,” said one.

Another added: “The deals were all well flagged in advanced, and well priced.”

Lowest risk

Andrew Moulder, an analyst at CreditSights, added that EDF was one of the lowest risk hybrids in the market. And while the French government owned 84.49% of EDF’s shares (presenting an element of sovereign risk) it meant that coupon deferral risk was insignificant, he said.

But for EDF, coming to the capital markets was about more than raising money, it was also a mechanism to show the wider world its plans for the future.

“Our positioning with the Green bond was about our new renewable energy projects only; it wasn’t about acquisitions and refinancing,” said Carine de Boissezon, senior VP for investors and markets. “EDF is all too often seen as a nuclear company, but that’s changed over the last three years. It isn’t easy for the market to see that until you do a project such as this.”

One of the biggest challenges was convincing investors that the Green bond was credible. Bondholders told EDF that as the Green bond market evolved, self-certification had lost its integrity. As a result, EDF employed Vigeo, an independent European ratings agency that specialises in corporate social responsibility.

“When we look at the corporates that issued Green bonds after us, we see that Vigeo was selected by them too. The auditing of our bonds – checking where the money had been spent, publishing the use of proceeds, etc – has created a standard for other issuers that want to use this market,” de Boissezon said.

The jumbo deal in January was more about opportunity than telling a story. The deal, which comprised two Century bonds – for US$700m and £1.35bn – a US$1.5bn 10-year deal, and three euro hybrids brought over five days, was arguably one of the most audacious transactions to have hit the markets in 2014.

Originally, the structure was only to include the US$1.5bn deal and the three hybrids, but a number of reverse enquiries around Century bonds for both US dollars and sterling led the issuer to rethink its strategy.

Learning from its experiences in January 2013 (when EDF printed a three-tranche euro and sterling hybrid along with a US$3bn 10-year perpetual tranche), the borrower knew it had to be a noisy and transparent communicator to get investors’ attention.

“To be successful with a deal like that, you need to create momentum and a buzz in the market,” said Stephane Tortajada, head of finance and investments at EDF.

“As significant issuers, others often didn’t want to be in the market at the same time as EDF. And by bringing everything to the table early, it gives investors the time to look into the structures and feel comfortable with them.”

Asked how he felt about the state of the market for issuers today, Tortajada said central bank policies had resulted in this being one of the best times, especially for high beta borrowers. In particular, the environment was positive for hybrids, as investors clamoured for higher yield, he continued. The compression of yields combined with the impressive orders that strong issuers are able to command has helped to create a robust corporate hybrid market in 2014.

Similarly, investors are considering longer durations to nudge up the coupons – music to utilities treasurers’ ears, according to Tortajada.

So will it return to the market with another jumbo offering before the end of this year? Only if the opportunity looks too good to miss.

“We have more than €20bn of cash available, so we don’t feel a huge need to go to market at the moment,” Tortajada said. “However, our retail bond matures in the summer so we’ll be monitoring the market, but if there’s no opportunity there’s no pressure for us to transact.”

 

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