October 19, 2011 / 4:00 PM / 7 years ago

Safe-haven utilities dominate primary market

LONDON, Oct 18 (IFR) - Utilities’ ability to power through headwinds stemming from harsh regulations, new taxes and the Fukushima disaster has earned them safe-haven status in the eyes of investors, and enabled even companies from peripheral European countries to access the primary market.

The last two weeks have seen three European investment grade utilities issue bonds that have attracted significant investor demand, performed well in secondary markets and — strategists say — inspired other sector peers to follow suite.

“In our view deals by Iberdrola and Enel show that, despite the sovereign uncertainty, the right euro utilities can still access the market,” strategists at research firm CreditSights wrote in a note, describing the sector as “still a safe-haven”.

“There have been negative impacts but we believe there are positive factors going forward and that the bad news is probably already out there,” they added.

Even though year-to-date euro-denominated issue volumes are higher in almost every other sector of the corporate market, the investment-grade issuance revival over the last month has clearly been spearheaded by utilities.

Nine of the 20 European corporates that have issued sterling or euro-denominated fixed-rate bonds in the last 30 days have been utilities, compared with only four construction companies and two auto firms.

“Utilities, with their defensive properties, are often among the first issuers to come to market after a period of volatility,” European Credit Management fund manager Jens Vanbrabant said.

Even though recent activity levels are not necessarily unusual, he said, utilities’ eagerness to transfer some of their bank funding could be a factor driving the borrowing.

French issuance, for example, surged at the end of last month with syndicate bankers and strategists pointing to rising borrowing costs and banks’ hesitance to lend in the face of new regulations and core capital requirements.

In peripheral countries, where banks may be struggling even more to meet capital requirements, the push towards the bond market may be even more intense.


“Utilities are entering the current period with fairly high levels of debt and high capex programmes. This means that they will continue to need to re-issue debt as old debt rolls, and issue new debt to finance their investments,” said Liberum Capital analyst Dominic Nash.

E.ON, the world’s largest utility by sales, for example, had EUR33.6bn euros of debt on its balance sheet when it posted first-half results in August.

Enel, which is not only Italy’s biggest but also Europe’s most-indebted utility had net debt of EUR46.1bn at the end of June. On Monday, it placed a two-tranche EUR2.25bn bond, shored up by a staggering EUR12bn in investor demand, helped by a sweet new issue premium.

A week earlier, Iberdrola priced a EUR600m long four-year issue attracting more than EUR4.5bn in demand, and EDF priced a GBP1.25bn senior unsecured 30-year sterling benchmark.

All three deals have performed well in secondary markets, tightening from their reoffer levels, and this series of new issues looks set to continue.

Assuming that market players’ predictions that the economy will likely get worse before it gets better are accurate, utility bonds will continue to prosper and will likely outperform, ECM’s Vanbrabant said.

“At the same time, peripheral utility bonds offer attractive spreads and would be attractive to investors who expect an eventual resolution to the sovereign debt crisis and peripheral countries to remain in the Euro.”

Austrian gas and oil company OMV, utility EVN and the UK’s Southern Gas Networks and Eastern Power networks have also launched deals in the past weeks.

Spain’s Areva attracted around EUR900m of investor interest for a EUR500m six-year bond in late September, and Nederlandse Gasunie successfully priced a EUR500m 10-year bond early this month.

In terms of potential issuers in the pipeline, though, syndicate bankers, strategists and analysts remain tight-lipped.

One syndicate banker said that Vattenfall, which is 100% state-owned and so in a different position to peers like RWE and EnBW, could be a hybrid candidate.

Vattenfall is currently trying to reduce debt by selling off non-core assets. It recently started the sales process for its electricity network and heat distribution assets in Finland and has approached potential buyers. (Reporting By Josie Cox; Editing by Julian Baker)

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