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.
It has already made good progress in its funding goals, amid investor support that makes E.ON’s targets look eminently achievable. In April it conducted its inaugural US$3bn 10 and 30-year Yankee transaction. This was followed up quickly with a dual-tranche euro benchmark, comprising extremely well-received five and 12-year transactions. Having attracted orders of €11bn across the two tranches, the euro bond issue raised €1.5bn for the five and €1bn for the 12, at swaps plus 73bp and 110bp respectively.
In May it issued a regional six-year bond targeting mainly second and third-tier institutional accounts, again attracting massive interest and raising €1bn at plus 75bp – or 113.7bp over Bunds – against an order book that reached €1.7bn within two hours of bookbuilding. And in June E.ON responded to reverse enquiries from a couple of large investors looking for a tap of the €1bn 2020s in a deal worth €400m.
Earlier in the year it had further tapped its euro benchmark bond 2017 tranche with €300m added in March 2008, taking the overall size of the issue from €3.5bn to €3.8bn. And last year it borrowed €5.8bn via the bond markets in euros.
In sterling it raised £1.5bn - £900m in 30 year paper and £600m in 12 year, with smaller sums raised in Swiss francs in three and seven year tranches. 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 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.