Innogy, the youthful business that was spun out of RWE in 2016, found plenty of takers when it decided on a green bond programme to complement its sustainable wind energy credentials. David Wigan reports.

Volker Heischkamp

In capital markets terms, German energy company Innogy is an old head on young shoulders. Following its spin-off from RWE and subsequent listing in 2016, the gas and electricity provider acquired a significant chunk of its parent’s debt. Innogy’s management wasted little time in launching a debt issuance programme, and soon became Germany’s first corporate issuer of green bonds.

Soon after its independence, Innogy – which is composed of the former renewables, network and retail business of Germany’s second largest utility – was assigned about €10bn of RWE senior bond debt, comprising some 18 securities with maturities in a range from one to 27 years. Given high servicing costs, a dividend ratio of 70% to 80% of adjusted net income and the need to grow a capital-intensive business, an early focus for Innogy’s leadership team was to put the company on a firm financial footing.

“We are a young business but we took on a lot of debt in different currencies and maturities so it was a must for us to tap the capital markets quickly,” says Volker Heischkamp, Innogy’s head of treasury. “Our aim was to maintain our leverage ratio at around current levels and retain the flexibility to invest in our business.”

A good match

With significant debt outstanding, and a debt to earnings before interest, tax, depreciation and amortisation ratio of about 3.7, Innogy put in place a €20bn issuance programme, giving it enough capacity to service its commitments and headroom for contingencies. The company issued its first senior bond in April via its finance unit, but soon had its eyes on Europe’s green bond market, which was an obvious match for its offshore wind projects in the UK and Germany, and its onshore project in the Netherlands.

Green bonds are a fast-growing asset class with some $117bn of issuance in 2017 (as of early December) compared with $82bn in the whole of 2016, according to the Climate Bonds Initiative. As investor demand has grown, corporate issuers have played a growing role, accounting for about one-third of 2017’s issuance.

Innogy set up its green bond programme in line with the Green Bond Principles published by the International Capital Market Association, and worked with research provider Sustainalytics to ensure its framework met requirements for use and management of proceeds.

“We wanted to make sure we stayed absolutely in line, so we started the process internally early in the spring and continued discussions with agencies through the summer,” says Mr Heischkamp. “Alongside [those activities] we worked with ABN Amro and Société Générale, who helped us decide on timing and the entire green framework.”

Rating upgrade

As plans for a green bond evolved, Innogy put together a core banking group for the provision of a new credit line, which would help cement its independence from RWE. The company decided to get the credit line in place before proceeding with the bond issuance, which took it into early October, when it secured at €2bn facility from a group of 22 banks.

“We signed the facility on the Friday and we were then ready to go with the bond,” says Mr Heischkamp. “It was an incredibly busy period because right after we signed the credit line we received an expected rating upgrade from S&P from BBB- to BBB, and we were also in the final stages of acquiring the 860-megawatt Triton Knoll windfarm project off the coast of Lincolnshire [in the UK].”

Following confirmation of the windfarm deal on October 10, the next day Innogy announced a 10-year benchmark green bond to the market, mandating ABN Amro, DZ Bank, HSBC, LBBW, MUFG and Société Générale as bookrunners.

“We announced the benchmark size and our internal plan was to aim for €750m,” says Mr Heischkamp. The deal went ahead on October 12, with initial price guidance set at mid-swaps plus 65 basis points (bps) area, but a wave of orders in the first two hours of marketing prompted new guidance of mid-swaps plus 50bps, plus or minus 3bps. By midday the order book had topped €4bn, with orders from some 250 investors, and final pricing for an €850 million issue was set at mid-swaps plus 47bps, 2bps or 3bps inside its existing curve.

A focus on renewables

 “To be honest, the demand was a lot more than we had anticipated and around double than that for the deal we did in April, and we wondered how much of that was to do with the fact that we were selling a green bond,” says Mr Heischkamp.

“It was a very high-quality order book with a lot of fund managers that are focused on green issues, and when we tightened we got even more orders, so we felt that the format definitely helped – in addition to the fact that we had a very good story.”

Innogy’s capital expenditure is focused on renewables, so it makes sense the company is likely to return to the green bond market in due course, amid plans to sell €1bn to €2bn of bonds a year going forward. “We will take a pragmatic approach, issuing green and conventional debt, depending on the intended capital expenditure,” says Mr Heischkamp. “However, there’s no denying our experience was very positive.” 

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