Iberdrola plugs into record-breaking hybrid supply

4 min read
EMEA
Ed Clark

Spanish utility Iberdrola is the latest corporate to add to the record-breaking volume of hybrid debt issued in Europe this year, raising €3bn of subordinated funding on Wednesday.

The Covid-19 pandemic and ensuing economic downturn has pushed corporate borrowers towards the instrument in unprecedented numbers as a means of bolstering balance sheets and credit ratings.

In the euro market alone this year, nearly €36bn of hybrid bonds had been issued prior to Iberdrola's new deal, compared to less than €23bn sold during the full 12 months of 2019, according to IFR data.

"You have two things driving hybrid issuance. From issuers there has been a strong interest in building and maintaining buffers in terms of ratings and balance sheet," said Atul Sodhi, global head of debt capital markets at Credit Agricole.

"Then, on the investor side, given where yields are, there is a very strong demand for the product."

And given that both economic conditions and the yield environment are unlikely to shift majorly in the near term, future issuance should continue along a similar path.

"I am very optimistic about the supply going forward," said Sodhi.


BUSY DAY

An action-packed day for Iberdrola saw the Spanish utility sell €1.6bn PNC5.5 and €1.4bn PNC8.5 hybrid bonds and announce results for the first nine months of the year, as well as the acquisition of PNM Resources in the US.

Although the stated use of proceeds for the two hybrid tranches included the financing of the growth of the company, leads said that the new issue was not directly linked to the acquisition but something that had been in the pipeline for some time.

Following a now well-trodden path, the inexhaustible investor demand for paper offering some yield meant that global coordinators BNP Paribas and HSBC could slim the yields they offered on the new bonds, fixing them at 1.875% and 2.25%.

The notes were marketed at IPTs of 2.25%-2.375% and 2.625%-2.75% and orders at one stage reached around €7bn.


M&A

On Wednesday, Iberdrola announced a US$8.3bn deal, including debt, to buy US utility PNM Resources through its US business Avangrid.

The transaction will create the third largest US renewable energy operator, with a combined market value of over US$20bn.

PNM's board approved the offer of US$50.30 per share and Iberdrola expects the deal to close in 2021, reported Reuters.

The deal places pressure on Iberdrola's net leverage, according to Fitch. However, this is mitigated by the 50% equity content of the new hybrids.

At senior and subordinated levels Iberdrola is rated Baa1/BBB+/A- (all stable) and Baa3/BBB-/BBB, respectively.

Iberdrola also published its results for the first nine months of the year on Wednesday. According to its figures, reported net profit grew to €2.681bn, up 4.7% compared to the January-September period in 2019.


HIGHER YIELD

Some investment-grade investors have also been considering new paper from UK energy producer Drax, which is rated BB+ by S&P and Fitch. Leads ran the bond off high-yield desks, however, investment-grade accounts were included in the transaction.

In fact, with the €250m 5NC2 secured bonds being offered at IPTs of 3% area, some high-yield buyers were unimpressed.

"Coming at such tight levels and asking for callability - absurd," said one.

"Why should I bother? [There is] plenty of other stuff that has better return potential with a lower yield because they are non-call life bonds."

The yield was set at 2.625%.

Drax was not the only energy producer and distributer out on Wednesday. Higher up the ratings spectrum, Italian credit A2A, which also has a focus on renewables and is rated Baa2/BBB, sold a €500m October 2032 senior unsecured at a spread of 85bp over mid-swaps.