Swedish state-owned utility Vattenfall became the first corporate to issue a hybrid bond in the sterling market in nearly two years on Tuesday, demonstrating the currency's pricing power in the process.
Unlike the euro market, which was inundated with supply, the energy company had the sterling market all to itself and took full advantage. The £250m 60.25-year non-call 5.25 green bond landed at a final annual yield of 6.885%, which was inside fair value and also arguably represented a cheaper cost of funding for the issuer compared with euros after adjusting for the cross-currency swap.
Sterling has become a sweet spot for corporates seeking duration thanks to the imbalance between supply and demand. That imbalance is even more pronounced for hybrids given how long it has been since one was priced in sterling. The last corporate hybrid in the currency was in June 2021, also from Vattenfall.
The purpose of this latest deal is to replace a US$400m 6.1% hybrid coming due for a call in November, albeit the decision to cap the sterling bond means that, overall, there will be a small reduction, of less than 4%, in Vattenfall's hybrid stock. "There will be a reduction in the stock but not enough to freak out the rating agencies," said a lead banker. Ahead of this deal, Vattenfall had about €2bn-equivalent of hybrid stock across five tranches in euros, US dollars and kronor.
The capped size was also a factor in Vattenfall accessing the sterling market rather than euros. "For the euro market, they would either have needed to increase their outstanding hybrids or do a sub-benchmark deal," said a second lead banker. While he acknowledged the bond landed inside Vattenfall's euro curve, he did not think the pricing dynamic "would be vastly different if the issuer had done a €500m deal".
Marketing began at 7.25% area, with leads Barclays, NatWest Markets and RBC Capital Markets putting fair value at about 7%. But a book, which was more than £800m at the guidance update, meant the final landing point came with a six handle. The second lead said the green label also played its part. "This is the type of green that everyone likes," he said.
The company's framework has a dark green rating from Cicero, and a governance score of excellent. Vattenfall issued its first green bond in June 2019 and had a total of more than €2bn in green financing outstanding at the end of 2022.
Despite the bond's successful outcome, a third lead banker downplayed the likelihood of any further imminent sterling hybrid supply. "There are no sterling hybrid tranches coming up for a call," he said.
Instead, issuers will be turning to the euro market. Corporates have raised €7.525bn through euro hybrids this year, according to IFR data. The last deal came from French telecoms company Orange, which last month raised €1bn through a perpetual non-call seven note.
Vattenfall is rated A3 (stable)/BBB+ (positive). Expected issue ratings are Baa2/BB+.