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Net4Gas breaks new ground with unique exchange offer

Czech energy company Net4Gas's unusual exchange deal had a special appeal to local investors. David Wigan reports.
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Václav Hrach

Václav Hrach

Czech natural gas transmission leader Net4Gas broke new ground in the European capital markets with a unique asset liability management exercise in which it swapped out of Eurobonds into locally documented securities. The swap enabled the company to term out its debt, ease its administrative burden and cater to the demands of local investors.

Net4Gas is the leading transmission operator in central Europe, transporting about 45 billion cubic metres of natural gas through 3800 kilometres of high-pressure pipelines annually. The group changed ownership in 2013, with German energy company RWE selling to Allianz and Borealis Novus, each of which took a 50% share. 

Following the sale, in 2014 the company set up a €5bn medium-term note (EMTN) programme. It subsequently issued about €1bn of new debt broadly divided into two buckets, one with a six-and-a-half- to seven-year maturity and the other with a 12-year tenor. The bonds were sold in various currencies including Czech koruna.

Right time to refinance

“The maturity on the shorter dated bonds was 2021 and we decided that while interest rates remain relatively low it makes sense to refinance some of that and reduce concentration risk,” says Václav Hrach, chief financial officer at Net4Gas. “We decided to focus on the koruna-denominated bonds under the EMTN programme and to launch an exchange offer to extend the maturity and bring the bonds under Czech documentation.”

Redocumenting under local rules would appeal to Czech investors, who were comfortable investing based on those conditions, he says.

The decision to extend the company’s fixed-rate debt followed a similar exercise in 2017, when it replaced its lines of bank credit due in 2018 and 2019 with new arrangements maturing in five years. Following the switch, credit rating agencies S&P and Fitch affirmed Net4Gas’s long-term rating at BBB with a 'stable' outlook, citing the new arrangements as supportive to the company’s plans to build out its infrastructure.

“We are certainly keen to keep our investment-grade rating, and that was taken into account when planning,” says Mr Hrach. “In this case we started thinking about doing an exchange as early as February, thinking we would like to get the bond into the market before the summer holidays, so the end of July at the latest.”

In the event, the offer went ahead in mid-July with local bank Česká spořitelna acting as sole dealer manager. Net4Gas offered to exchange its 2.25% Czech koruna bond due in 2021 listed on the Irish Stock Exchange, of which there was Kcs7bn ($320m) outstanding, for a 2.75% koruna-denominated bond due in July 2025 and listed on the Prague Stock Exchange.

According to Allen & Overy, the lawyers for the bank on the transaction, the deal was “unique and truly innovative” and represented a “first-of-its-kind exchange offer”. The transaction required a combination of exchange mechanics with a switch from international notes (issued on the Eurobond market with ‘XS’ ISIN and cleared through Euroclear and Clearstream) into domestic bonds (issued and primarily settled locally into the Czech Central Depository with a ‘CZ’ ISIN and cleared outside the international clearing systems).

Long-term planning

The exchange offer was in principle set on a one-for-one basis, with the yield promised at a market rate, but in the end the company offered a small premium of about 10 basis points.

“We did a soft sounding and got the market response and there was a bit of a premium, which was acceptable because we wanted to set attractive conditions for investors,” says Mr Hrach. “We understood from our bankers that any take-up above 30% for this kind of transaction is considered positive. We were finally able to exchange 38% of the 2014 bonds, so we were very happy with the result."

The relatively high level of participation was especially gratifying given the deal’s unusual structure, the exchange switch and the new clearing arrangement.

“To avoid a significant cash liability, we needed to ensure all of the clearing arrangements were in place in time, and the process was untested so it was quite complicated and perhaps stressful because we wanted it all to happen quickly,” says Mr Hrach. “The lawyers had quite a lot of work on their hands to ensure all of that went smoothly. However, in the end it was a great transaction that enabled us to execute on our long-term strategy.”

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