RWE Bondholders Find Solace in ECB Buying That Trumps Downgrade

  • German utility’s bonds still yield less than BBB peers
  • ECB bought RWE bonds under corporate debt purchase program

RWE AG euro bond investors are taking their cue from the European Central Bank’s purchases of the German utility’s debt, rather than this week’s downgrade to the brink of junk by S&P Global Ratings.

Average yields for RWE euro notes have fallen more than half a point this year to 1.02 percent, according to a Bank of America Merrill Lynch index of bonds with an average maturity of about five years. That’s less than the 1.26 percent that investors demand to hold similar-maturity BBB rated debt of companies including Volkswagen AG and AXA SA.

The ECB last week added investment-grade corporate notes to its 80 billion-euro monthly purchase program to stimulate the region’s flagging economy, with purchases that included RWE’s 600 million euros ($676 million) of notes due February 2033, people familiar with the matter said at the time. The bond buying overshadowed RWE’s downgrade to BBB- by S&P on Monday, which cited concerns about the utility’s nuclear cleanup liabilities as well as how it will manage the planned separation of its renewables and grid business.

“The ECB plays the biggest role indeed given that RWE falls under the names eligible under the corporate sector purchase program,” Nadege Tillier, a credit analyst at ING Groep NV in Amsterdam, said by e-mail. The utility’s bonds have also been supported by demand from investors in need of yield, who “do not necessarily like the name fundamentally but they have to have names that bring some yield in their portfolio.”

Vera Buecker, a spokeswoman for RWE in Essen, Germany, declined to comment.

Yields Fall

The promise of ECB intervention has driven average yields for investment-grade euro notes down to 0.92 percent on Thursday, the lowest in more than a year, according to Bank of America Merrill Lynch index data.

While RWE’s notes yield less than their BBB rated peers, they’re still perceived as being riskier than other utilities, which yield 0.87 percent on average, index data show.

The utility plans to separate its renewables, grid and retail customer business into a separate company, of which RWE will sell about 10 percent in an initial public offering this year. While more stakes may be offered, the utility intends to keep a majority.

RWE is “prepared” for a non-investment grade rating, Chief Financial Officer Bernhard Guenther told reporters on a call last month, without saying whether he expected it to happen. The utility is seeking a “pragmatic and realistic” solution as the risk premium proposed by Germany’s government-assigned commission on the funding of the country’s nuclear exit by 2022 would mean an additional burden of 1.7 billion euros for the company, he said.

“RWE AG could eventually end up as high yield,” Andrew Moulder, an analyst at CreditSights Ltd., said by e-mail. “But if the senior bonds are moved into the Newco then you will be in a much lower risk entity with no exposure to German nuclear or conventional generation and that is a relatively safe place to be.”

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