Alessandra Pasini
As the global shift towards renewable energy continues, traditional power companies have been busy reinventing themselves. But few match the foresight and innovation of Snam, the owner and operator of Italy’s natural gas distribution network, which is currently pursuing a €6.5bn investment plan and has been snapping up green technology businesses. It also recently acquired a stake in the United Arab Emirates’ energy infrastructure, which is its first investment outside of Europe.
Dual priorities
This ambition also extends to its financing. Since its demerger from Italgas in 2016, two priorities have driven Snam’s funding strategy. One is to lower interest payments. It has gradually replaced the costly legacy debt put in place during the eurozone crisis by leveraging its good credit quality and the fact that it trades well inside the Italian government bonds’ yield curve.
“At end 2015 the cost of funding was 2.84%. Today, it’s 1%,” says Alessandra Pasini, Snam’s chief financial officer. “Of course, that’s partly the result of a significant compression in rates, but also because we have been incredibly proactive in taking every opportunity to accelerate the reduction of our funding costs.”
The other financing priority is sustainability. “We had always been very focused on sustainable finance conceptually, but we’d been less focused on maximising the proportion of sustainable financing vis-à-vis our total debt structure,” she says. That started to change two years ago when Snam transformed its revolving credit facility into a sustainable format, and published its climate action bond framework.
Hydrogen power
That framework was a variation on the green bond label; proceeds went towards investments in biomethane and energy efficiency, and investors had full transparency over the use of funds. The notable difference, of course, is that Snam belongs to the fossil fuels industry. Its debut climate action bond in early 2019 – which was also the first in Europe – was a resounding success. It was five times oversubscribed, proving that investors are keen to buy paper from so-called brown issuers that are committed to reducing their carbon footprint.
Later that year, a handful of issuers from emission-intensive industries sold similar deals, marketing them as transition bonds. Meanwhile European policy-makers had started to focus on the importance of hydrogen, a low carbon gas, to help achieve the bloc’s goal to be climate-neutral by 2050. “If you listen to the European Commission’s (EC) strategy, it’s clear that hydrogen is a core part of the new green deal,” says Ms Pasini. “It’s the only way, along with renewable electricity, that Europe can reach net-zero emissions.”
These developments were important for Snam’s funding decisions. It had recently become the first European company to blend hydrogen with natural gas in its network, and the fuel was crucial to its clean energy transition. “We asked ourselves what is the best instrument to increase our share of sustainable financing, and which also aligns with our investments to accommodate a growing percentage of hydrogen in our infrastructure,” says Ms Pasini.
The answer was transition bonds. Snam renamed its climate action bond framework to align with the emerging asset class and updated its eligible projects by adding, inter alia, its hydrogen activities, which were recognised in the EC’s new taxonomy on sustainable investments.
An opportune moment
For its first transition bond Snam opted for a €500m deal with a 10-year tenor, to match its 2030 goal to cut carbon dioxide-equivalent emissions by 40%. It had watched the market since the beginning of 2020, waiting for a window among the Covid-19 turmoil. That opportunity came in early June.
“We had done a lot of pre-funding in 2019, but we were convinced it was the right time to come to market. We had been absent a few months, and while volatility had been quite high, we thought there was appetite for good quality paper coming out of Italy,” explains Ms Pasini. “So we strongly believed we could capture a good window.”
A few days before its June 10 launch, Snam mandated nine bookrunners: Banca IMI, Bank of America, BBVA, BNP Paribas, Goldman Sachs, JPMorgan, MUFG, Société Générale and UniCredit. It opened in the morning at mid-swaps plus 115 basis points (bps), and was followed at 10.30am by a post-launch presentation.
“This isn’t overly common but it was important for us to explain to investors the logic of the framework and how it differed from the climate action framework,” explains Ms Pasini. “As soon as they [understood], we saw a very solid order-book that peaked at almost €1.8bn at guidance.” This allowed Snam to tighten to mid-swaps plus 80 bps, achieving a 0.75% coupon and negative new issue premium. Some 70% of buyers were environment, social and governance (ESG) accounts.
At a crucial time in the development of the transition bond asset class, the deal proves ESG investors are willing to look beyond green bonds. “We believe – and frankly the reception of the market confirms – that this is the right choice for a company like Snam. And being realistic, at the current state of the market evolution, transition bonds are the only way we can aspire to a net-zero 2050,” says Ms Pasini. “If half the world is doing renewables and the other half isn’t becoming more sustainable, we’ll fall short of that ambitious target.”