The UK’s largest energy utility, National Grid Gas, tentatively reopened the sterling corporate bond market earlier this year, in the face of unfavourable conditions. Edward Russell-Walling reports.
Some said there was no market, but National Grid Gas proved them wrong. The UK’s largest energy utility (and the US’s second largest, by customer numbers) reopened the sterling corporate bond market in February with a £300m ($604m) issue, although it did not come cheap.
As one of the UK’s most indebted companies, National Grid is a familiar sight in the capital markets, issuing regularly, in a wide assortment of currencies and with maturities in the majority of years out to 2056/57. When it last reported, in September, it had gross debt of £18.5bn and cash of £2.2bn.
Malcolm Cooper, group tax and treasury director at National Grid, says: “One reason was that for some years we had felt that credit spreads were increasingly attractive, so in the past 18 months we have done a huge amount of prefunding. This was borne out by the credit crunch.”
As Mr Cooper points out, five years ago, utilities could expect to pay about 100 basis points (bp) over Libor. That steadily declined until the early summer of 2007, those heady days when the spread had narrowed 20bp to 30bp. “Since then, it has gone back to the low hundreds, in broad terms.”
Net debt levels
By the end of March 2008, the company’s financial year end, National Grid will have net debt of about £18bn. That will rise again to £22bn over the next few years, to fund its extensive investment programme in transmission and distribution.
Mr Cooper says: “In the next five or six years, £16bn will be spent on our infrastructure so our debt will rise over that time”.
During this period, National Grid’s regulatory asset value – which regulators use to set returns – will rise by 35% in the UK to £19bn and by nearly 30% in the US to $18bn. “That significant growth in our asset base means we can sustain debt,” says Mr Cooper.
The company has some serious funding to do in the next few years, not least because it has some significant maturities coming up between now and 2009.
Funding needs
“We have funding needs of £3bn to March 2009. We expect to do a material proportion of that in the short-term market, backed up by committed facilities, undrawn, of about £3bn but perhaps £1bn of it will be long-term debt.”
The recent issue forms what, under the circumstances, is a vital part of that. The deal did not come together in a hurry. “It was a lot slower than it would have been a year ago,” says Mr Cooper. “Then it would have been a matter of a few days. With markets as they are, it took a few weeks of investigation.”
Market caution
Debt investors are very cautious, not least because while spreads continue to widen they must ask themselves whether they could not get the same paper 5bp cheaper next week. National Grid reasoned that, with the amount of funding it had to do, it would have to bite the bullet sooner or later.
If any names are in favour, sound utilities are and sterling issues have been exceedingly sparse. So with lead managers, HSBC and Royal Bank of Scotland, it launched a 12-year bond, with initial price-guidance of 125bp over Libor.
“Pricing is not fantastic today for anybody,” says Mr Cooper. “But with an all-in coupon of 6.38%, we’re probably where we would have been with the same bond in July last year. We’re driven mainly by pricing and we try to find a spot that suits the investor.”
The company started by looking for £200m, and managed to pull in orders approaching £400m. As a result, it increased the size to £300m, although the pricing did not change. “It wasn’t overfull, but it was enough and we were very happy to get it,” says Mr Cooper.
Rating downgrade
The deal succeeded in spite of a ratings outlook downgrade from ‘stable’ to ‘negative’ by ratings agency Moody’s. This was in response to National Grid’s announcement that it would increase its dividend by 15% this year and by 8% a year to 2012.
“The revised dividends policy is off the back of our confidence in our financial profitability going forward,” says Mr Cooper. “I think the downgrade was a function of Moody’s general nervousness. I am hopeful that in the next six to 12 months, we can convince them that it is not justified.”
