Energias de Portugal reopened the Portuguese securitisation market in May 2013 with a deal that used a new type of underlying asset for the country and an independent investment bank as sole bookrunner. The company's chief financial officer explains how.
According to the three major credit rating agencies, Portuguese debt is junk. The country was downgraded to below investment grade last year and there it remains. However, sentiment towards Portugal has improved – a change that first became noticeable in mid-2012. That shift not only gave the Portuguese government room for optimism, it also allowed some of the country’s largest companies to reconsider their options in the debt market.
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Energias de Portugal (EdP) was one such company. A leading gas and electricity business with interests in Portugal, Spain and Brazil, the group re-entered the corporate bond market in 2012 but was keen to do more, specifically with a particular asset relating to renewable energy.
A proportion of all electricity consumed in Portugal comes from renewable sources but renewable energy prices benefit from subsidised rates. To make the system commercially effective, a subsidiary of EdP purchases the renewable energy and reclaims the difference between the subsidised price and the market price from its customers through their electricity bills.
Between 2010 and 2012, EdP was obliged to pay €1.2bn in renewable subsidies, an amount known as the tariff deficit. Consumers began paying for these subsidies in 2012 and will carry on doing so until 2016. The system has been operational for several years and has worked extremely well.
Securitisation approach
Under these circumstances, EdP and some of its more enterprising bankers began to think last year that the tariff deficit could be used as the basis for a publicly placed, international securitisation issue. The group had already completed two bilateral private placements but a public transaction was a rather different proposition.
“At the end of last summer, when the market began to improve, we started devising a way to approach international markets. This type of asset can be sold bilaterally but we knew that if we issued a public transaction, we would establish a market price and this could pave the way for future transactions,” says Nuno Alves, chief financial officer at EdP.
Independent capital markets firm StormHarbour suggested that EdP should gauge investor appetite by a mini-roadshow. EdP agreed and the boutique arranged for the company to meet 12 to 15 leading institutional investors in Europe.
“StormHarbour believed there was appetite for a securitisation issue so it organised a roadshow for us even though it did not have a clear mandate. During the roadshow, we could see demand was there so we mandated StormHarbour to start structuring a deal. We already knew many of the people at the firm from their previous institutions and we were comfortable with their proposals,” says Mr Alves.
Post-crisis groundbreaker
Securitisation issues have always been more complex than plain vanilla bonds but they have become considerably more challenging since the financial crisis. The EdP deal was destined to be the first securitisation from a Portuguese borrower since the financial crisis so the process needed to be handled with particular care. The deal had to be properly structured, it had to be approved by the Portuguese regulators, and it had to be rated by the credit rating agencies.
“The asset is not straightforward or easy to understand but we always believed in its strength and we always knew it was not Portugal per se. This type of asset has existed for six years and there have never been any repayment problems,” says Mr Alves.
“If consumers default on their payments, the tariff increases so everyone has to pay more but you are cut off if you do not pay for more than two months so there is a strong incentive to pay,” he adds.
The rating agencies evidently agreed and rated the securitisation issue three notches higher than the Portuguese sovereign, at BBB/Baa3. On May 13, the books opened, with StormHarbour as sole arranger and bookrunner. EdP then embarked on a second roadshow, visiting London, Munich and Paris for further investor meetings.
The total size of the asset had also shrunk since last year, from €1.2bn to €900m, as Portuguese consumers had already begun to pay down the tariff deficit. Despite the shrinking amount, potential investors still had many questions to ask, chiefly around the strength of the asset.
“We had to try to explain how the asset worked and that there was a high probability that investors would get paid. The rating that we had endorsed this but it still had to be explained in detail,” says Mr Alves. “Given that this was the first public securitisation issue of electricity receivables in Portugal, we also had to explain how the system worked and how payments would be made.”
Upsized deal
Initially, the deal was set at €300m with a spread of 125 to 150 basis points above Portuguese sovereign bonds. Demand was strong, however, and the deal was increased to €450m while the spread was set at 132 basis points, giving an all-in yield of 4.25%, the tight end of initial guidance. More than half the investors came from the UK, with most of the rest split evenly between northern and southern Europe.
“We were very happy with the way the deal went. If economic conditions remain relatively stable, we could to do a similar transaction next year,” says Mr Alves.
