Italian energy company Snam demerged from Italgas in 2016, and since then has pulled off several deals to reduce its debt financing costs, ultimately leading to a rating upgrade. David Wigan reports.
Italian natural gas infrastructure company Snam is one of Europe’s leading providers of storage, transportation and regasification, with some 40,000 kilometres of pipeline and 19.5 billion cubic metres of storage capacity. Its key role in energy markets means Snam is highly regulated in respect of its tariffs and returns. As such, it requires a sophisticated approach to balance sheet management as it aims to keep its cost of debt below regulatory targets.
Since the company’s demerger from Italgas in 2016, Snam has embarked on a series of liability management exercises with a view to extending its debt profile, reducing long-term financing costs and increasing fixed-rate exposure. The company dropped some of its expensive credit lines, unwound derivatives and in late 2016 spent some €3.1bn buying back bonds (€2.75bn in nominal terms) with an average coupon of about 3.3% and average maturity of about three years, in what was Europe’s largest ever investment grade corporate bond buyback.
Getting costs down
Those actions reduced Snam’s average cost of borrowing to 2.4% but the finance team, led by finance director Sergio Molisani, intended to take things further in 2017 by locking in Europe’s ultra-low interest rates and very flat curve. Over the first nine months of this year it sold €500m of public fixed-rate bonds, €650m of privately placed floating rate notes (swapped back to fixed) and €400m of convertibles. In July, it signed a new 20-year financing agreement with the European Investment Bank, borrowing €310m at a 1.5% fixed cost, which meant the company had met most of its funding needs up until 2018.
By mid-2017, Snam had dropped its average cost of funding to 2.2% and extended its debt average maturity to 5.5 years, from five years at the beginning of January. Keen not to rest on its laurels, the company also planned a liability management exercise for later in the year involving the sale of a new fixed-rate bond in benchmark size, in conjunction with an intermediated tender offer on eight outstanding bonds worth about €4.3bn.
“We targeted the October window because we wanted to get in ahead of the European Central Bank meeting at the end of the month, at which we felt we were likely to see indications of eventual monetary tightening and perhaps a reduction in its bond purchase programme, in which we are active,” says Mr Molisani. “Still, we wanted [the deal] to be after September, in which there is a lot of competitive capital markets activity.”
After speaking with bankers, Snam announced a potential deal on October 10 for an “expected” €500m 10-year bond and the planned buyback. Joint bookrunners on the new issue were Bank of America Merrill Lynch, Barclays, BNP Paribas, ING, Mediobanca, Mizuho, Mitsubishi UFJ Financial Group and Société Générale, while the offerer on the tender was BNP Paribas, working with dealer managers Banca Intesa, Barclays, Citi and Société Générale.
“As in our previous asset liability management exercises [2015 and 2016], our aim was to cut our debt financing costs, smooth our maturity profile and extend duration, but in this case we did not include an explicit cap on the tender. We wanted to see how it would play out,” says Mr Molisani. The offer included a “dynamic cap” and soft wording in the offer memorandum, indicating to investors which bonds might be prioritised.
French interest
On the new issue leg of the deal, the order book progressed steadily, and soon after the books opened Snam had €1.75bn of orders, allowing it to revise down official guidance from mid-swaps plus 70/75 basis points (bps) to mid-swaps plus 60bps plus or minus three. Despite that revision, orders kept on coming, and the book closed at a final price of mid-swaps plus 57bps, implying just 2bps of new issue premium. French investors were especially active, eventually accounting for 52% of the total allocated. The deal was upsized to €650m and the final coupon was 1.375% (and final yield 1.46%) which was 70bps inside the 10-year Italian government bond at time of the issuance.
On the tender leg of the transaction, Snam acquired all the bonds that were tendered, comprising some €607m in nominal terms, representing a hit rate of about 14% – not bad given all of the bonds had been targeted previously. “Given the strongly anti-cash environment, in which you get punished for holding cash, it made a lot of sense to invest our money in our existing bonds,” says Mr Molisani. “The average yield on the bonds we bought back was 0.2%, which is quite an uptick on the negative to zero returns we would have from putting cash on deposit.”
Snam was upgraded to BBB+ by Standard & Poor’s in October and with the company’s average maturity now out to 5.9 years (and average cost of debt falling by the end of the third quarter to 2.1%), Mr Molisani and his team can reflect on a satisfactory year’s work.
