Engie delighted investors by reopening the European investment-grade corporate hybrid market on Thursday with a €1bn Green perpetual non-call six-year one month bond, which came alongside a tender offer.
The French utility’s deal was the first publicly offered high-grade corporate euro hybrid since Vodafone’s €2.5bn bond in September. Engie’s transaction marked the first time it has taken advantage of revised S&P methodology on the refinancing of hybrids.
Engie opened an any and all buyback offer of its €1bn 3.00% perp notes callable in June 2019, with the aim of leaving its hybrid stack the same size after the new bond.
European utilities like Engie have sizeable Green bond funding needs as they look to shift their businesses to more renewable energy sources. While hybrid bonds are a useful way for such companies – partially or wholly government-owned such as Engie – to obtain equity-like funding.
But the universe of Green hybrid issuers is still quite small – consisting of just Engie, Orsted, Iberdrola and TenneT.
“The question is more on the market side,” a lead said. “You need a sufficiently strong window for hybrids – Green bonds have much more of a reputational aspect to them, and companies do not want to be forced to pull a deal.”
For that reason, Engie picked a solid window, coming after successful higher-beta trades from issuers including crossover credit Telecom Italia last week. Appetite for higher yielding paper has picked up: Engie’s final books were €6.25bn (pre-rec) for the €1bn bond. And, in a sign of investor demand for Green bonds, one account took down 25% of the bonds in a reverse inquiry, leads said.
“In a market where the ECB is no longer a relevant player, the Green format may provide an additional anchor for investors to be involved in book-building,” a DCM banker away from the deal said.
Green-focused bond investors like hybrid deals because they offer their portfolios a yield boost versus senior paper, a second lead said. The success of the deal could lead to further hybrid issuers jumping into the market while the going is good.
Engie (A2/A-) targeted a first reset/call date of February 28, 2025, in order to round out its hybrid curve, leads said. Aside from the non-call June 2019s, the company has three other outstanding hybrid perps: notes 4.750% July 2021s, notes 1.375% notes callable in April 2023s and 3.875% notes callable in June 2024s. All carry Baa1/BBB/BBB+ ratings.
But, still, calculating fair value on the new bond proved tricky. The company’s hybrid curve is inverted: the April 2023s were bid at 3.42% pre-announcement, while the June 2024s were at 3.20%, according to leads.
The problem stems from the non-call 2023 bond’s low coupon, a result of a hot market in 2018 but which now reduces its attractiveness to investors, a lead on the new bond said. In addition, the lower coupon means such bonds are less likely to be called at the reset date because they tend to be lower than market levels.
After taking this feature into account, leads set fair value at around 3.5%. That made the premium at the tight end of IPTs of 4.00%-4.125% around 50bp – a premium that was wiped out by price progression to 3.5% annual yield.
Bank of America Merrill Lynch, Citigroup, Deutsche Bank, HSBC and NatWest Markets were the leads.
Source Nasdaq