RWE Meets Investors as Decade-Low Power Prices Tarnish Bonds

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  • Debt insurance costs for RWE more than double this year
  • RWE shares are biggest loser on Germany's main stock index

RWE met investors in London under a cloud of slumping power prices and open-ended nuclear clean-up costs that placed the German utility’s bonds among the worst performers in Europe this year after commodity trader Glencore Plc and Volkswagen AG.

RWE went into its “Credit Day 2015” at Deutsche Bank AG’s offices on Wednesday with its securities handing investors an 8.5 percent loss on average this year, according to Bank of America Merrill Lynch’s Euro Non-Financial Index of investment-grade corporate notes. Bonds in euros sold by Glencore forfeited 25 percent, those of miner Anglo American Plc lost 16 percent and VW’s gave up 13 percent.

RWE, Europe’s largest carbon dioxide emitter, is suffering in Germany’s transformation from an economy powered by nuclear and fossil fuels to one based on renewable energy. Conventional generators are hurting as wholesale electricity prices change hands at their lowest level in more than a decade and amid speculation that atomic plant operators haven’t set aside enough money to decommission reactors.

“The tone generally seemed quite positive, notwithstanding the difficult market backdrop,” Nicholas Harrison, a London-based credit analyst at RBC Europe Ltd., said in an e-mailed note to clients. “Given the underperformance of RWE bonds, there may be an increasing willingness from investors to look at RWE given the greater risk/reward,” though nuclear provisions remain the main uncertainty, he said.

RWE shares fell to the lowest level since at least 1992 on Tuesday, the biggest losers on Germany’s benchmark DAX Index this year. The stock recovered 4.4 percent to 10.17 euros by 3:02 p.m. in Frankfurt. The cost of insuring RWE’s debt with credit-default swaps has more than doubled since December.

Standard & Poor’s downgraded RWE’s debt one level to BBB, the second-lowest investment grade, in August, citing depressed power prices and an “adverse political environment in its home market.” S&P’s outlook is negative as RWE may struggle to maintain its ratio of funds from operations to debt “strongly above” 18 percent through 2017 from 21 percent last year.

Other Downgrades

Other power companies were also downgraded, with S&P cutting Vattenfall AB’s rating one level on Monday due to falling profitability and pressure on cash flows. Moody’s Investors Service lowered Dusseldorf-based EON SE’s outlook to negative on Sept. 11.

Further ratings cuts risk pushing investment-grade debt to high-yield, or junk, status, boosting borrowing costs as the risk of default increases. European high-yield bonds pay interest of 5.8 percent on average, compared with 1.5 percent for investment-grade company debt, Bank of America indexes show. RWE’s notes in euros yield 2.3 percent on average.

“Investors are foreseeing RWE as a potential high-yield-rated name in the medium term if no solutions are found to adapt the business model of the company,” Nadege Tillier, a credit analyst at ING Bank NV in Amsterdam, said by phone. “People think it’s clearly a potentiality. German investors aren’t sure themselves whether the company will be existing in two years’ time.”

RWE has “several billions of available financial reserves,” Volker Heischkamp, the head of treasury at RWE, said by e-mail before today’s investor meeting. “Liquidity is no issue for us.”

The company aims to keep access to capital markets by striving to keep its investment-grade debt rating, maintaining a positive cash balance and ensuring nuclear provisions are accounted for, according to the utility’s “Credit Factbook 2015” accompanying details of Wednesday’s investor and analyst conference.

Hybrid Bonds

RWE has 18 billion euros ($20.2 billion) of bonds outstanding, including 5.3 billion euros of hybrid capital, according to RWE. Hybrid bonds are treated partly as equity by ratings companies, which reduces assessments of indebtedness.

The utility’s 700 million euros of 2.75 percent hybrid notes due April 2075 have slumped more than 20 cents on the euro to 78.35 cents, the lowest since the bonds were sold in April, according to data compiled by Bloomberg.

Operating profit from conventional power generation at RWE, which runs three nuclear power plants, fell by more than half in the first six months of the year. On top of that, RWE earmarked 10.5 billion euros as of June 30 to shutter its atomic plants under Chancellor Angela Merkel’s orders to phase out nuclear power by 2022 in a shift to renewable energy.

Germany’s utilities are still awaiting government guidance on the cost of nuclear decommissioning. So far, power companies including EON have set aside about 38 billion euros, a figure that Der Spiegel said may be short by as much as 30 billion euros. The government said there is no draft or final results of stress tests requested by operators.