The participants:
- Hans Tschuden, CFO, Telekom Austria Group
- Jan-Maarten van Osch, treasury director, KPN
- Patrick Claude, vice-president, treasury and financing, Renault Group
- Antonio Paccioretti, CFO, Snam
Q: What are your company’s approximate funding needs over the short and medium term that will not be financed from cash flow?
Hans Tschuden: Telekom Austria Group pursues a conservative finance strategy; first priority is a constant investment grade rating of BBB 'stable'. In the medium term, the company aims to reach a leverage ratio net debt/Ebitda [earnings before interest, taxes, depreciation and amortisation] of [two times its present level]. Maintaining financial flexibility is another important aspect of the strategy, as this flexibility enables the company to manage existing operational challenges on the one hand, while on the other hand securing funds for strategic investments.
In 2013 Telekom Austria Group's funding needs are made up mainly of contractual redemptions and strategic investments, such as the acquisition of the mobile virtual network provider Yesss!. Telekom Austria Group preserved liquidity by issuing a €750m senior bond in April 2012 and a €600m hybrid bond in January this year. Therefore we have in the short and medium term no or only limited funding needs.
Jan-Maarten van Osch: [Dutch telecoms firm] KPN has a senior debt portfolio of approximately €12bn outstanding of which we need to refinance approximately €1bn to €1.5bn per year. During the first half of 2013, KPN has executed a significant capital raising consisting of €2bn hybrid bonds and a €3bn rights issue. As a result, we are prefunded for the coming period and have very limited funding requirements in the short to medium term.
Patrick Claude: Renault Automobile Division’s funding needs have significantly decreased since the 2008 financial crisis. More than €9bn of deleveraging has been achieved through regular free cashflow generations and financial asset disposals. As of the end of 2012, Renault had a positive net cash situation. Therefore the funding needs have reduced significantly, from €2bn of long-term borrowings (maturities greater than one year) finalised in 2012 down to €1bn forecasted for 2013, and are mainly dedicated to maintain liquidity reserves at a good level.
Going forward, these long-term funding targets will be adapted every year depending on the following years’ bonds redemption profile, Renault's long-term ratings and the economic context worldwide. Short-term bank borrowings are very limited in size and remain focused on currencies and countries that can’t be financed by the mother company.
Antonio Paccioretti: We have set ourselves ambitious capital expenditure targets for our four-year plan period, with investment totalling more than €6bn, driving RAB [regulated asset base] growth of about 3.5% per year to 2016. Approximately 50% of this growth will be financed via our operating cashflow. Our solid balance sheet – with net debt/RAB averaging 55% over the plan period – will enable us to fund the remainder in the debt capital markets and through banking facilities.
The origins and future of the Eurobond market
- An interview with Tim Skeet, managing director at RBS
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Q: What is your mix of bank loan and bond financing, and how do you expect it to change over time?
PC: For more than 10 years, Renault has developed and maintained a very clear strategy to finance its commercial and industrial activities exclusively from capital markets (and, to a lesser extent, from public development banks for specific industrial investments). Banks confirmed credit lines remain significant (€3.5bn as of the end of 2012) but are kept undrawn and considered as a last resort in case of market disruption. We do not expect to change this strategy, which seems now to be considered by the market as the right answer to the evolution of banking system regulation. By exception, as previously said, some Renault subsidiaries have locally negotiated limited short-term bank borrowings in countries that cannot be financed through intercompany loans.
HT: The debt financing of the Telekom Austria Group is based on a well-diversified and long-term portfolio. We aim to reach a balanced financial structure through a mixture of bank and capital market financings, which provides maximum flexibility with favourable conditions. As of March 30, 2013, approximately 72% of this portfolio was made up of bonds with a total volume of €2.75bn, due for repayment in 2022 at the latest.
The remaining 28% of the portfolio was made up of loans mainly from national and some international banks. As a consequence of recent regulatory developments in the banking sector, we expect a further cost increase in bank loans. Hence, we see a continuing trend of growing importance of debt capital markets.
AP: The past nine months has shown the market that [gas infrastructure company] Snam can benefit from access to all the main financing channels, allowing the company to enjoy the combination of bank debt flexibility, lower cost and longer dated bonds, as well as cost-competitive institutional funding from the likes of the European Investment Bank and CDP [Italian state-backed fund Cassa Depositi e Prestiti], with maturities of up to 20 years. Following our most recent bond issuance in early April, our debt is funded 60% in bonds, 35% in bank debt and 5% from institutional lenders. Funding two-thirds of the debt in the bond market is appropriate for our RAB-based business, which has long regulatory periods, but it also gives us the flexibility to take opportunities for additional financial efficiency and sustainable value creation as they arise.
JMvO: We use the bond markets as our main source of long-term funding, with currently €12bn of senior unsecured bonds outstanding. Next to our senior bonds we have €2bn in hybrid capital instruments. In terms of bank funding, we have a €2bn revolving credit facility provided by a group of 14 international relationship banks. This facility is used primarily as a source of back-up committed liquidity, rather than for permanent funding.
Q: What conditions are you finding for accessing bank or bond financing at present?
JMvO: In general, market conditions have been very good due to the combination of investors having plenty of cash to put to work and historically low yields. Eurobond issuance levels have therefore been high with new transactions generally seeing very good demand and credit spreads tightening. This has resulted in favourable issuance dynamics in the bond market and, as a result, many issuers have chosen to prefund more than usually would be the case.
The low absolute yield environment has also caused investors to consider longer tenors to achieve their yield targets. Another aspect is that investors have been willing to go down the capital structure to achieve a pick-up in yield, which can partly explain the record issuance of corporate hybrid bonds. These market dynamics enabled us to generate strong demand for the €2bn hybrid bonds that we issued in March.Â
Bank financing continues to be available for well-rated corporates, although the general trend of a more focused approach from banks on which customers they lend to will continue as banks focus on strengthening their balance sheets and meeting regulatory capital requirements. Our bank facility was refinanced in 2011 and does not mature until mid-2017, therefore we have not been active in the bank lending market in any material way recently.
AP: Our bond curve – covering all maturities to 2022 – speaks for itself as a key point of reference for our cost of debt, and suggests we can make significant savings over the cost of bank debt. On April 3, Snam issued two bonds for a total amount of €1.5bn with an average yield of 2.8% and an average maturity of 5.4 years. This issuance enabled Snam to achieve a yield well below that of previous bond issuances executed in the first part of our refinancing exercise – when the payment of a debut premium was inevitable – while keeping the average maturity of our portfolio unchanged. We are confident of reaching a final agreement with our relationship banks with regard to the credit facilities signed in mid-2012, to align the implied cost of debt with today’s market conditions.
HT: As mentioned before, in this challenging environment, a conservative financial profile based on a solid investment-grade rating is the highest strategic priority of Telekom Austria Group in order to maintain access to the capital markets.
Resulting from Telekom Austria Group’s high creditworthiness, we are offered very attractive conditions for both bank and bond financings. For example, in April 2012 we funded ourselves by a €750m senior bond with a maturity of 10 years and a coupon of 4% – significantly below the group’s average cost of debt. Moreover, we succeeded to issue the first hybrid bond in the telecommunications sector. Last year we redefined our relationship banks by closing a €735m revolving credit facility.
PC: Long-term financing transactions have been very volatile in terms of coupon and spread since the 2008 crisis. Moreover, the 2011 to 2012 European public debt crises added specific volatility to a cyclical name such as Renault. Nevertheless, the recent improvement of the worldwide credit markets pushed down Renault’s spreads, along with interest rates, which are still very low thanks to the central banks’ quantitative easing policies. Renault’s current five-year spread is now in the mid-200 basis point area in euros. This leads to a potential coupon of 3.5% for a five-year Eurobond, far beyond the 4.5% achieved in 2012 in that currency.
Q: What currencies and formats do you consider for bond market funding?
HT: Telekom Austria Group's revenues are mainly generated in the eurozone. Therefore our refinancing and funding needs are also denominated in euros. Because funding in other currencies, such as US dollars and Swiss francs, adds additional complexity and risks, we focus on euro financings only. A stable euro market offers sufficient opportunities for capital market and bank loan funding. Additional funding sources are for short-term financing euro commercial paper and asset-backed securitisation and for medium and long-term financings with German promissory notes (schuldscheine) and private placements.
JMvO: KPN is predominantly a euro-based business as our main operations are in the Netherlands, Germany and Belgium. Therefore our debt portfolio is mainly euro denominated. However, we also consider other currencies depending on relative value (on a swapped basis), available tenors and to diversify our funding sources. We currently have UK pound- and US dollar-denominated bonds outstanding, representing roughly 25% of our total debt portfolio. In general we will consider most main currencies for our bond issuance, although swapping back to euros always needs to be factored into any decision.
In terms of structure, we normally issue senior unsecured bonds from a medium-term note programme that we update annually. This gives us an efficient way to access the Eurobond market quickly. We also consider private placements to fill smaller funding requirements. Finally, we have issued €2bn of hybrid capital instruments, which are subordinated and receive 50% equity credit from the rating agencies.
PC: Renault is of course a regular issuer in the Eurobond market and has also developed other sources of funding for diversification purposes. Renault is the sole European corporate name with a regular presence on the Japanese market (one samurai bond per year on average since 2001) thanks to a very good name recognition following its alliance with Nissan, and despite a low rating for this market. Renault is also developing its presence on the offshore Chinese yuan market with three dim sum bonds issued during the past 12 months (in the top 10 in terms of worldwide outstanding bonds among non-Chinese issuers). We would like to maintain a regular presence in these three currencies, while being opportunistic for other currencies. Formats are limited to plain vanilla transactions.
AP: For the time being, the conditions we’re seeing in the euro debt capital markets are adequate for our needs. As a result the euro will remain our core market in the next few months. In the medium term, we are ready to consider other currencies in order to exploit potential diversification benefits and extend the depth of our reference markets. With regard to formats, we are confident that the debt capital markets will offer Snam the full spectrum of products to optimise our assets and liabilities management that is a key success factor of our business model.
Q: What are your hedging needs (foreign exchange, interest rates and so on), and how do you select counterparty banks to meet those needs?
PC: Renault is exposed to currency fluctuations that are fully hedged for financial assets and borrowings, and generally not hedged through financial products for recurrent commercial flows. Interest rate risk is minimised by balancing floating-rate funding and cash on hand (floating-rate deposits), and through fixed-rate funding to cover the industrial investments not financed from cashflow. Commodity risks are currently partially hedged within one year. All of our hedging needs are limited to plain vanilla, over-the-counter derivatives, negotiated with our banks, as these transactions are often considered as a positive side business for the banks’ credit lines.
JMvO: All our non-euro denominated debt is swapped to euros as KPN has very limited operational need for other currencies. Although we generally have a fixed-rate interest profile, we use derivatives to manage the interest duration on our bond portfolio.
Counterparty risk is of course an important aspect of our hedging strategy and our policies mean that we deal with banks rated A2 or higher and we actively monitor the credit strength of our counterparties. For certain longer dated swaps, reset clauses at pre-agreed dates have been used to mitigate counterparty exposure during the life of the swap.
AP: Foreign exchange is not relevant at Snam. Most of our focus is on real interest rates given their impact not only on our debt but also on our assets, as we run a return-based business where revenues are set by the regulator considering, among other things, the evolution of the 10-year Italian government bond yield and domestic inflation. Our counterparties are selected among our relationship banks on the basis of competitive tenders where banks’ bid-price, market expertise and standing are the key criteria for success.
HT: Generally Telekom Austria Group hedges currency risks that may have an impact on its cashflows. We are exposed to currency risks, especially in Belarus, Croatia and Serbia. Unfortunately these currencies are expensive and difficult to hedge as foreign exchange markets for these currencies are not well developed and illiquid. We therefore concentrate on hedging via natural measures such as de-dollarisation and price increases.
We are also exposed to euro-interest rate risks. Telekom Austria Group monitors a ratio of fixed and variable debt defined by cashflow-at-risk and value-at-risk limits. We use derivative instruments and other measures to meet and support our risk limits.
The selection of counterparty banks is primarily based on Telekom Austria Group’s core banking principle and risk policy with respect to the know-how and pricing of the counterparties.
