Vattenfall Cash Piles to Buoy Bond Holders: Nordic Credit
Investors holding Vattenfall AB’s bonds are set to benefit from a drop in supply as the Nordic region’s biggest utility redeems existing debt and refrains from selling more in an effort to burn through its surplus cash.
“We don’t consider issuing new bonds today, even if today’s levels are attractive and cheap,” Johan Gyllenhoff, head of treasury at the utility, said by phone. “We have surplus liquidity thanks to the asset sales in 2011, which gave us so much money that we can use it to repay our loans. In late 2013 we’ll reconsider our options regarding refinancing.”
Vattenfall, which is owned by the AAA rated Swedish state, has emerged as a favorite among investors fleeing assets tainted by Europe’s debt crisis. Cost cuts delivered ahead of schedule and increasing cash from divestments have allowed the company to avoid debt sales for a year.
“The market is pricing Vattenfall’s bonds fairly, although they have become expensive,” Mikael Anttila, who helps manage about $7.8 billion in fixed-income investments at SEB AB in Stockholm, including Vattenfall’s debt. “If returns from credit markets worsen, Vattenfall’s bond spreads would likely widen less than Italian and Spanish utilities.”
The company, based in Solna near the Swedish capital Stockholm, faces $2.9 billion in bond redemptions next year. Even so, a 50 percent annual increase in cash and short-term investments to 47 billion kronor ($7.1 billion) at the end of the third quarter mean the utility is under no pressure to issue new debt. Vattenfall amassed the funds after selling its Finnish electricity distribution network and heat business, as well as its Polish heat generation unit in the first quarter.
“They’ve no real need to reissue bonds,” Andrew Moulder, senior utilities analyst at CreditSights Inc. said by phone from London on Dec. 10. The company might consider a debt sale “if they look at it opportunistically, and want to get their name back in the market.”
Vattenfall is rated A- at Standard & Poor’s, four levels above junk, and its outlook is stable. Its A2 rating at Moody’s Investors Service is five levels above non-investment grade, with a negative outlook since Feb. 21.
Sweden’s challenging economic conditions and “strong hydro reservoir levels could result in sustained downward pressure on both demand and electricity price levels,” potentially reducing revenue, Moody’s said then.
Vattenfall’s German rival EON SE and Finnish competitor Fortum Oyj (FUM1V) are also rated A- at S&P, while Norwegian utility Statnett SF’s credit grade is two levels higher at A+.
“In today’s market and flight to safety, our financing costs have dropped,” Gyllenhoff said. “We’re considered part of the safe category for investors.”
The utility, which generates power using hydro and nuclear assets and is expanding in wind farms, last raised money on the bond markets in November 2011, when it sold 2 billion kronor in floating-rate notes. Its latest euro-denominated bond dates from May 2009, sold at a spread of 165 basis points over the mid-swap rate. Vattenfall has 1.35 billion euros ($1.77 billion) of the securities outstanding.
“The market perceives no risk in countries where Vattenfall operates, such as Sweden, Finland and Denmark,” Anttila said. “Vattenfall’s bonds are safe, stable, and predictable, and don’t offer yield pickup. Many want to buy Vattenfall’s bonds no matter what the price is, as a core holding.”
Vattenfall is getting rid of cash that isn’t generating returns as interest rates hover close to record lows. Still, the company isn’t interested in investing in high-yielding securities, Gyllenhoff said.
“The primary objective is to see to it that the liquidity is invested safely and that we don’t risk losing what we’ve earned from our core activity,” he said. It’s “not to maximize returns on our liquidity. We’re cautious when it comes to taking on debt, since we get lower returns than ever when investing the liquidity.”
Some of the cash will be spent to redeem debt maturing next year, including a floating-rate 1 billion-krona bond due on April 22 and 2 billion kronor of May 22 securities with a variable rate. Vattenfall will also make a payment to Nuon NV’s shareholders for an acquisition completed in 2009. Spending the cash to repay bond holders will be “positive” for the company, Anttila said.
The utility sold 1 billion euros of 5.25 percent perpetual bonds in June 2005, with a call date of June 29, 2015. It plans to buy back the securities then, Gyllenhoff said. The market has priced in the call, according to Moulder.
The perpetual bond “offers better returns” than the utility’s other bonds, Anttila at SEB said. “It still is attractive, though it was even more tempting earlier this year.”
Vattenfall had 161 billion kronor in gross debt on Sept. 30, according to its website. Net debt fell to 114 billion kronor from 141 billion kronor at the end of last year. It also has 31.6 billion kronor of unused credit facilities.
The company is keeping its options open on selling a bond or raising hybrid capital in late 2013, according to Gyllenhoff. Such a bond would probably be “well received” by the market, Moulder said.
“It’s almost a bit frustrating, seeing very good opportunities and attractive interest rate levels available in the market, for long maturities and at very low coupon rates,” Gyllenhoff said. “We almost look forward to bonds maturing next year, so that we can reduce our liquidity. It costs money to have a big cash register -- we get no return on it.”
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