Utilities in Europe have raised billions in fresh debt over the past few weeks to shore up their finances as they cope with a host of challenges brought on by the coronavirus pandemic.
The recent bond bonanza among electric and multi-utilities peaked April 7, when Portugal's EDP - Energias de Portugal SA, Germany's EnBW Energie Baden-Württemberg AG and Britain's SSE PLC raised almost €2.5 billion between them.
The busy day in new issuances capped a four-week period in which some of the sector's biggest names headed to the capital markets for new financing lines, with green bonds issued by the likes of Spain's Iberdrola SA, Germany's E.ON SE, France's Engie SA and Swedish state-owned Vattenfall AB. Spanish gas utility Naturgy Energy Group SA and water and waste groups such as Veolia Environnement SA and Suez SA have also ramped up their debt funding in recent weeks.
Analysts said the issuances showed utilities' relative resilience to the coronavirus and the economic shock the pandemic has wrought across the globe, thanks to solid investment-grade ratings and a large share of regulated revenue that is insulated from the broader market turmoil.
"These recent deals confirm our views that the sector, which is highly rated, still has good access to financing, both bond and bank debt," Pierre Georges, a senior director and the sector lead for European utilities at S&P Global Ratings, said in an email. Although yield spreads are higher now than before the crisis, Georges pointed out that the coupons on the recent bonds would still lower the utilities' average cost of debt.
Although utilities have been caught up in the wider equity market sell-off — the market capitalization of the 20 largest companies in Europe dropped by more than €60 billion in the first quarter — the sector is less affected than many other industries. Grid operators rely on entirely regulated income, and integrated groups have significantly reduced their exposure to market-exposed electricity generation over the past few years.
Still, many companies are feeling the impact of a steep drop in power prices caused by a fall in commodities and lower demand for gas and electricity amid suspended industrial activity. Retail suppliers are also bracing for a potential increase in bad debts and a working capital squeeze as customers fall behind on bill payments. Companies with strong expansion plans in energy services also face a slow year as orders dry up.
Combined with already tight headroom under their credit metrics at the end of 2019, these factors have already led S&P Global Ratings to lower its outlook to negative for Fortum Oyj, Uniper SE and CEZ a. s., which all have large amounts of merchant generation, and to place Engie on credit watch negative. Fitch said it is also monitoring the situation of smaller speculative-grade utilities, especially in emerging markets where household tariffs are sometimes still cross-subsidized from industrial and commercial customers.
Continued market access
But utilities have taken pains to point out their strong liquidity amid the crisis, and companies have taken other measures to preserve cash, including suspending shareholder dividends and postponing planned investments. Some, like Engie, have also withdrawn previous financial guidance as they wait to see how large any impact to their business turns out to be.
The strong interest from investors for the recent bond issuances bodes well for utilities' ability to keep raising money if and when they need it in the coming months, according to Paul Marty, a senior vice president in Moody's EMEA infrastructure finance team.
E.ON's €750 million green bond, issued March 31 with a 1% coupon and maturing in October 2025, was eight times oversubscribed, according to the company. E.ON had raised €2.25 billion across three tranches in January, and CFO Marc Spieker emphasized on a March 25 investor call that the company had already pre-funded all of its 2020 maturities.
"From today's point of view, there is absolutely no risk that we will fall short of serving our financial obligations ... even with prolonged stress in financial markets," Spieker said, pointing to a "sizable amount" of cash and securities on hand as well as more than €5 billion in undrawn credit lines.
Engie said its triple tranche of senior bonds, issued March 24 with an average coupon of 1.71% and an average maturity of eight years, was almost four times oversubscribed and has boosted liquidity to €16.4 billion, including €8.6 billion of cash. CFO Judith Hartmann highlighted the company's continued strength in the green financing market specifically, notwithstanding the current economic crisis.
Moody's Marty said in an email that the high subscriptions prove there is "solid appetite from investors for a sector which is seen as relatively resilient (albeit clearly not immune) to the fallout of the coronavirus outbreak because of the essential nature of the services it provides."
"We expect that utilities will continue to benefit from a relatively favorable access to financing because of their perceived defensive characteristics," Marty said.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.