EDF: Hybrid landmarks

EDF has launched some of the largest hybrid transactions in the market. Here, Carine de Boissezon, senior vice president, investors and markets at EDF, discusses what makes the hybrid instrument attractive to the company, how it approaches new issuance, and what it expects from the market going forward.

Bank+Insurance Hybrid Capital: EDF’s hybrid transactions in 2013 and 2014 have established themselves as the reference for other European names, with the 2013 transaction being the largest multi-tranche corporate hybrid ever: what was the rationale for EDF to issue this kind of instrument?

Carine de Boissezon, EDF: EDF is investing in its future growth and is one of the few companies in the sector which has such an important development capex. Given the long term construction span of most of its industrial projects, the Group today has around Eu11bn of capital employed not contributing to its EBITDA. The rationale for issuing an instrument such as a hybrid was to strengthen our balance sheet through the investment cycle. With around Eu10.1bn of hybrids done through our transactions in 2013 and 2014, we have almost aligned our hybrid funding with our capital needs for future growth.

BIHC: To what extent do you think hybrids have changed the perception of your name to investors (credit and equity)? In your view, what have been the most important benefits?

De Boissezon, EDF: We have given the same message to both categories of investors, and this was about the alignment of our financing structure with our industrial strategy. When we first issued in January 2013, we managed to raise Eu6bn because investors understood that this was not a one-off to avoid a rating downgrade. For both categories of investors, it became clear that EDF had done the most drastic work in the utility sector in terms of balance sheet restructuring over the last four years: by selling non-core assets, increasing the maturity of our debt while reducing our average coupon, etc…

BIHC: What were the main structuring challenges that you had to face before issuing?

De Boissezon, EDF: Given that in both 2013 and 2014 we were issuing multiple tranches in multiple currencies, the main challenge has been one of organisation and time to market, as it took several days between the launch and closing of the operations, and we were in different time zones. We wanted to be first movers, as well, in order to achieve the right level of interest. What makes it a success is that we could offer investors what they really care for in terms of products and maturities thanks to regular interactions that we conduct with them through the year. Contrary to most of our peers, we clearly spent more time meeting debt investors than equity investors in 2013 and 2014.

BIHC: How important was the equity accounting for you and the impact on your financial structure/credit metrics?

De Boissezon, EDF: It is one of the critical elements in connection with the cost. Given the significant decrease in the subordination premium, it became a very attractive instrument for us back in 2013. Another of the important aspects was the investor diversification it brought us. As a regular issuer, we also need to ensure we are tapping new pockets of funds.

BIHC: EDF has also been innovative in its mix and extension of maturities: how did you determine your best choice of maturities?

De Boissezon, EDF: One of the most important objectives of the management when it joined about five years ago was to adapt the financing structure to the industrial strategy, and one of the first actions was to extend the maturity of our gross debt, which stands now at 13.2 years versus 8.6 in 2010, while our average coupon is now 3.46% versus 4.4% over the same period. This move was strongly helped by the 100 year bonds we issued back in January 2014 in both sterling and US dollars.

BIHC: What determined the currency mix between euros, US dollars and sterling? Was it about liquidity purposes or to create a natural hedge for your operations?

De Boissezon, EDF: We consider both the liquidity and the rationale with our operations. In that respect, the sterling market stands out. It is our second domestic market in terms of operations as we are the biggest generator in the UK and we are strongly investing for the future with our new nuclear projects. But it is also a market where you can raise very long dated bonds, as was demonstrated with our 100 year bond issue, which had never been done before, not even by the Bank of England! As far as US dollars is concerned, we issued a very large amount in January 2014 while our operations there are more limited, but it was, firstly, linked to the strong demand we had identified from US investors for good European corporate credits, and secondly, given the attractive rates, we swapped most of it back in euros.

BIHC: What is your view on current market conditions and on the potential evolution of this asset class?

De Boissezon, EDF: Monetary policies have clearly distorted what people view as “normal market conditions”. The recent move from the ECB is another step in this direction. The current market is therefore an issuer’s market, and sovereign and corporate issuers can benefit from exceptional financing conditions. The quest for yield from investors has led to two different trends: more risks; and longer maturities.

On the other hand, the hybrid asset class is here to stay because it does address a real need on the liability side of the balance sheet. The surge in this asset class in the corporate sector follows a well-established trend in the FIG sector.

BIHC: Do you have further plans or any strategic intention to issue given the attractive conditions?

De Boissezon, EDF: EDF monitors the market on a regular basis and has an opportunistic view to seizing the right windows.

BIHC: Do you plan to continue your diversification by currency and the build-up of your (hybrid) curve?

De Boissezon, EDF: Given our focus on extending our debt maturity and investor diversification, we will indeed be looking at all opportunities that fit this strategy. But it is clear that euros and sterling will remain our core currencies.

BIHC: EDF also issued what was at the time the largest ever century bond: what were the merits of this relative to hybrids? Did you enlarge your investor base with new accounts? Did you consider alternatives?

De Boissezon, EDF: Compared to the hybrid issuance and looking at a 15 year horizon, the coupon for the century is not that different, but the liquidity in sterling was striking and this was the reason we decided to go ahead. Demand from private wealth management was quite important, too. And, as mentioned before, our primary objective is to extend the maturity of our debt and clearly the century bonds have played a big part in reaching that goal.