Goldman Distaste in Denmark Turns Dong Into Buy: Nordic Credit

Opposition to Goldman Sachs Group Inc.’s planned investment in Dong Energy A/S has opened up a bet on debt sold by the Danish power and oil producer.

Yields on the bonds climbed amid rising resistance to the 8 billion kroner ($1.5 billion) investment, with a former prime minister saying that selling to the Wall Street firm is morally and financially wrong and jeopardizes Denmark’s environmental agenda. The government is seeking to sell a stake to shore up the utility’s finances after failed natural gas bets.

“I would use these recent small declines to buy the bonds as the debate is only white noise,” Jens H. Thomsen, a credit analyst at Jyske Bank A/S, said by phone. “It’s very likely that the deal goes through and that would be very positive for the credit profile.”

The yield on Dong’s 6.25 percent bond due 3013 rose to 5.78 percent in Copenhagen at the end of last week, the highest since Nov. 7. It yielded 5.67 percent on Jan. 9 before the criticism intensified over New York-based Goldman’s investment. That was the lowest yield since the note started trading on June 24, according to Composite Bloomberg Bond Trader prices. Today, the yield fell to 5.77 percent, the first decline in seven trading days.

Goldman Veto

As part of the investment, Goldman will be able to veto a possible sale of new shares or hybrid capital, changes in senior management or acquisitions before a possible initial public offering in 2018. The state will retain a 57.3 percent stake in Skaerbaek-based Dong, which operates offshore wind parks and explores for oil and gas.

Other minority owners are ATP and PFA, the country’s two largest pension funds, as well as five local energy companies. No other investor gets the same veto powers as Goldman.

The Red-Green Alliance, which has 12 of the 179 seats in parliament, says the state, not Goldman, should inject the needed money and that it will vote against the deal. The Danish People’s Party, with 22 seats, last week threatened to withdraw its support, saying Goldman’s veto powers would be too great.

“It would be bad for the bonds if the capital injection is postponed,” said Thomsen. “But it seems pretty certain that there’ll be parliamentary support for the deal.”

Best Bidder

Social Democratic Prime Minister Helle Thorning-Schmidt and Finance Minister Bjarne Corydon, as well as Dong Chief Executive Officer Henrik Poulsen, have defended the deal, saying Goldman offered the best price among bidders. Parliament’s biggest opposition party, the Liberals, as well as the Conservative Party, have also said they will back the transaction.

Goldman, which is making the investment via its European merchant banking unit, has said it plans to back Dong’s current focus on offshore wind.

“This is a long-term investment and we support the management team’s current strategy across the company’s activities, including the significant renewable energy investments,” Sophie Ramsay, a London-based spokeswoman for Goldman Sachs, said in an e-mailed reply to questions. “This strategy, supported by the Danish State and other minority shareholders, will create value for all shareholders in the years to come.”

Dong is selling the shares as part of a financial restructuring announced in February last year to cut costs, reduce debt and bolster investments in oil and gas exploration, as well as wind farms. The plan included cutting expenses by 20 percent and selling assets to raise 10 billion kroner.

Credit Positive

Standard & Poor’s and Fitch Ratings both have BBB+ issuer ratings on Dong with negative outlooks. Moody’s Investors Service has an equivalent Baa1 with a stable outlook. Analysts at all three companies said in October that Goldman’s presence was credit positive.

More than 145,000 Danes had as today signed up on an online petition, urging parliament’s finance committee to reject the Goldman Sachs deal at its next meeting Jan. 30.

Four Danish pension funds are prepared to invest in Dong to get the government to drop the agreement with Goldman Sachs, Jyllands-Posten reported Jan. 25. citing Anders Bondo Christensen, chairman of Laerernes Pension.

The government hasn’t received a “serious approach” from the four funds, Finance Minister Corydon said in a statement the same day.

“It would be a gamble with Dong Energy and the value the company has to the Danish society if we now were to create uncertainly about the company’s needed cash injection,” he said.

Jyske’s Thomsen is also sanguine that Dong would get capital even if the Goldman deal falls through.

“In that scenario, the state would inject money, though probably not as much as the private investors will under the Goldman deal,” he said. “The only really bad thing that could happen for the bonds would be if the government is forced to call early elections before the deal is completed, which would postpone it and possibly make Goldman part of the election campaign.”

Denmark’s government, which is behind in most opinion polls, has the power to call general elections at any time and must do so before a September 2015 deadline.

Before it's here, it's on the Bloomberg Terminal.