Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeJuly 31 2007

Enel goes to bond market

Italy’s Enel is set to become a bond market regular, following its successful bid for Spain’s Endesa. Finance chief Claudio Machetti talks to Edward Russell-Walling about its latest corporate issue.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Enel, Italy’s biggest electricity utility, has been a rare visitor to the international bond markets, since it has not been short of cash. But its acquisition of Spain’s Endesa has put an end to that, and it inaugurated its new status as a regular borrower with the biggest corporate issue of the past 18 months – €5bn equivalent in five tranches and two currencies.

Enel last came to the public debt markets in 2004 and, before that, in 2001. “Before the Endesa deal, Enel had no particular financial needs,” says head of finance Claudio Machetti. “Our cashflow was more than enough to finance our investments. But after this acquisition, the scenario changed dramatically. From now on we are likely to become quite a regular issuer in the bond market.”

The acquisition in question was one of Europe’s most intriguing cross-border takeover contests. Back in 2005, Endesa – Spain’s privatised national electricity incumbent – seemed ripe for the plucking. Its share price was low and investors were unsure what its growth strategy was. That September, Catalan energy group Gaz Natural bid for the company.

Touch of finesse

In February 2006, German utility Eon launched a higher offer and the drawn-out battle became fiercely political, in Brussels as well as Madrid. But in February 2007, Enel – having raided the market for 25% of Endesa – finessed them both. It teamed up with local construction group Acciona to amass 46% of Endesa between them. Eon stepped aside in April, in return for some €10bn worth of Endesa and Enel assets.

The successful bid valued Endesa at about €42bn, and Enel will end up with a maximum of 75% of the company. To fund it, the company signed a facility in April for €35bn in three tranches – €10bn over 12 months with an 18-month optional extension, €15bn over 36 months and €10bn over five years.

“The facility was structured to allow us to be very flexible over repayment,” says Mr Machetti. “We don’t want to feel under pressure when we are refinancing.”

The aim is to repay or refinance about 50% of the entire facility by the end of 2008, and Enel got off to an encouraging start with its June bond issue. The multi-tranche structure was dictated by the sheer size of the transaction. “If you want to raise €5bn, you have to diversify the currencies and the maturities,” says Mr Machetti.

The issue was made up of €1.5bn in 10-year paper with a coupon of 5.25%; €1bn in seven-year floating rate notes (20 basis points over three-month Libor); €850m in 20-year paper (5.625%); £550m in 12-year notes (6.25%); and £550m in 30-year paper (5.75%). The company would have preferred a 30-year maturity for the long-dated euro tranche but feared there might have been insufficient demand, whereas institutional enquiries had demonstrated strong demand for a 20-year issue.

Sterling issue

“The real uncertainty was over the sterling issue,” Mr Machetti recalls. “This was our first venture into the sterling market, excluding private placements. As a new name for that market, however, we were optimistic that we could find good demand.” And so it proved. In fact, the entire issue met with good demand, despite bumpy market conditions and credit rating downgrades by Moody’s and Standard & Poor’s (following the purchase of the original Endesa stake) right in the middle of the five-day roadshow. “I can’t say that the downgrade was unexpected, but we didn’t expect it that week,” Mr Machetti says. “It was not helpful.”

The company had been prepared to settle for €3bn, but market response prompted it to go for the €5bn maximum authorised by the board. Investors liked the quality and the fact that Enel had not visited for some time. Utilities are much in favour right now and investors saw the Endesa deal in a good light. Each tranche was priced at the tightest end of its range. What’s more, with the transaction fully pre-hedged, at the time of issue the hedge was showing a €300m capital gain.

Mr Machetti emphasises that, while Enel will be coming back to market in the future, it will not be tapping the institutional euro or sterling markets either this year or early in 2008. “That’s a promise we made to investors during the roadshow,” he says. “However, it is possible that we may issue in US dollars or tap the Italian retail market later this year.”

Was this article helpful?

Thank you for your feedback!