Europe’s first-ever sustainability-linked bond for a high yield issuer will enable Public Power Corporation to accelerate its transition away from heavy-polluting energy sources to renewables. 

As the sustainability-linked bond (SLB) market gathers momentum, it has expanded to include high yield issuers and investors. The first European high yield SLB has come from Public Power Corporation (PPC), a Greek utility notorious for its historical dependence on lignite, or brown coal. HSBC was joint global coordinator and sole SLB structuring adviser.

PPC – or Dimosia Epicheirisi Ilektrismou, as it is at home – is part of the country’s national fabric. “It is synonymous with Greece,” says Alexandra Konida, head of wholesale banking at HSBC Greece.

The company was established after the second world war to consolidate and spearhead Greek electrification. It relied heavily on reserves of lignite in the Peloponnese and Macedonia as cheap fuel for power generation. Today, while it has added meaningful hydro, gas-fired and oil-fired capacity, with a small contribution from renewables, lignite still accounts for some 40% of generation.

Greek giant

PPC remains overwhelmingly the largest generator and supplier of Greek electricity, with a monopoly in distribution, though transmission has been spun off into a separate entity. It was wholly state-owned until 2001, when an Athens listing saw 34% of its shares sold to the public. Subsequent share sales have reduced the state's holding to 51%, but it remains the largest state-controlled company in the Hellenic Republic. 

The company's first foray into the debt capital markets was in 2014. It raised €700m in a dual-tranche transaction — a three-year slice with a 4.75% coupon and a five-year element paying 5.5%. “The three-year bond was repaid in 2017, and there was a plan to refinance the five-year tranche in the capital markets,” says Ms Konida. “In the end, however, the company had to repay the five-year with expensive bank financing.” 

The reason was that the company’s profitability had taken a dive, particularly after the price it had to pay for carbon emission rights rose sharply in 2018.

Under pressure from the EU, for some years it was also obliged to give third parties access to its low-cost lignite and hydropower sources by auctioning off electricity at a discount to wholesale market prices. These so-called ‘NOME’ auctions took their name from a French pricing model that likewise overrode market mechanisms.

Change of government

Then, in the summer of 2019, a business-friendly New Democracy government replaced the leftist Syriza administration. One of its first acts was to replace the politically-appointed PPC management with a dynamic new team, which moved quickly to repair the damage and address the future.

The new management rationalised PPC’s tariffs, passing on some of its carbon costs to customers. It made growth in renewable energy a strategic priority; unveiled an aggressive decommissioning plan for lignite-fuelled plants; and began digitising distribution and the retail business.

In this case, a goal was to have a deal largely anchored by international investors buying into Greece again

Christoph Hadrys, HSBC

Given Greece’s financial difficulties and the fact that PPC is by far the largest electricity supplier in the country, the company had also encountered a debilitating problem with overdue receivables. The new management imposed a strict policy on collections, which it outsourced to a third party.

A final obstacle to capital market access was removed when the new government abolished NOME auctions in late 2019, with the agreement of the EU. “That allowed PPC’s earnings before interest, tax, depreciation and amortisation (Ebitda) to normalise, showing that the company was back on a firm footing,” says Kirshnee Moodley, a director in HSBC’s leveraged and acquisition finance team.

Back to bonds

After allowing enough time for the effect of NOME’s disappearance to be reflected in PPC’s bottom line, attention turned once again to the possibility of a bond issue. One new credit rating and an upgrade to an existing rating were secured towards the end of 2020.

HSBC was ratings adviser on a debut Fitch long-term issuer default rating of BB- with a stable outlook. Fitch noted the more volatile and less transparent regulatory and operating environments in Greece, compared to other European jurisdictions, but also acknowledged the company’s long-term stability following its strategic repositioning and constructive Greek energy reforms since 2019.

If Fitch had come to the rating with no historical baggage, Standard & Poor’s had rated the business since 2014. It was persuaded to upgrade PPC’s long-term credit rating from B- to B with a stable outlook. It said it expected a ‘substantial’ increase in Ebitda as PPC accelerated lignite closures and shifted its retail competitive position.

Fast phase-out planned

In what it reckons is the fastest lignite phase-out programme in Europe, PPC plans to cut lignite as a fuel to zero by 2028. “PPC has the largest hydroelectric portfolio in Greece,” says Catharina Zuber, a vice-president in HSBC’s leveraged and acquisition finance team. “Now it is building its renewables capacity. The key here is decommissioned open coal mining land, upon which solar capacity can be built.”

PPC intends to raise renewables’ share of total generation to 15% by 2023 – in 2019 it was less than 2%. It is one of the last players in Europe to invest in renewables on a large scale, and management decided to use the new bond issue to underline the seriousness of its intentions. A green bond was one possibility. However, the proceeds would have to be earmarked for a green project, and would not directly have addressed the lignite question, which could have kept some environmental, social and corporate governance investors away from the deal.

A SLB, on the other hand, could be linked to an emissions reduction target. “And an emissions reduction target aligns fully with PPC’s sustainability strategy,” says Lokesh Arora, who works on deal origination and advisory services in HSBC’s sustainable bonds team.

It was decided to run with an SLB linked to the company’s carbon dioxide emissions. The target is a 40% reduction by the end of 2022, with 2019 as the base year. A step-up provision increases the coupon if the target is not met.

Showing commitment

“Management didn’t want this to be just greenwashing,” Ms Moodley says. “So, to show their real commitment, the step-up is a 50 basis points (bps) uptick, compared to the more usual 25bps.” The test will be applied in 2023, some years before the bond's maturity, so a step-up would impose a real cost.

“Given the systemic nature of the company, the whole country will be watching,” says Christoph Hadrys, a director in HSBC’s leveraged finance syndicate.

Management didn’t want this to be just greenwashing

Kirshnee Moodley, HSBC

Sustainalytics was brought in as a second party opinion (SPO) provider to give the SLB framework its blessing and to rate the key performance indicator (KPI) and sustainability performance target (SPT). “Sustainalytics is credible and known in the environmental, social and governance (ESG) bonds market, with more experience in SLBs than any other opinion provider,” Mr Arora says. “And they were able to meet the timeline we wanted.”

The HSBC bankers note that, where delays used to be more usually associated with queueing for credit ratings, the current popularity of ESG bonds means that they are more likely to occur when seeking SPOs.

In its final SPO document, Sustainalytics rated the KPI of reduced Scope 1 carbon dioxide emissions as “very strong”, the highest of four available categories. It rated the SPT (a 40% reduction) as “ambitious”, the second-highest possible category, after “highly ambitious”.

It was decided that the transaction would not need US investors to get over the line, so the issuer opted for a Reg S only deal. With HSBC and Goldman Sachs as joint global coordinators and joint physical bookrunners, PPC launched a €500m five-year non-call two SLB. Proceeds would be used to refinance existing debt and for general corporate purposes.

“In Greece, a lot of bond deals benefit from local bids — Greek banks,” says Mr Hadrys. “In this case, a goal was to have a deal largely anchored by international investors buying into Greece again.” PPC management didn’t want a local bond, they wanted an international bond. “And they got it,” he says. That said, the bank will not disclose geographical distribution figures.

Initial price thoughts of 4% to 4.25% hardened into official price talk of 4%, thanks to strong demand. With an “oversubscribed” order book (no figures were available), the coupon was finally set at 3.875% and the deal upsized to €650m.

This was followed by a €125m tap bringing the total SLB to €775m. PPC CEO Georgios Stassis later paid tribute to HSBC, describing it as a “tremendous resource” which had helped the company to structure the optimal transaction.


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