Green shoots
Vattenfall reopened a corporate hybrid sector that had seen no supply for almost two years with its £250m 60.25-year non-call 5.25 green bond in early May. Its reception and demonstration of the currency’s pricing power when compared to euro alternatives put a marker in the sand and encouraged others to follow.
Just a couple of weeks later, Vodafone doubled the sizing stakes with a £500m offering that came alongside a €750m tranche. The following month, BT made its hybrid debut in its home currency with a £700m transaction. As the sizes grew, so did the pricing benefits, but it was Vattenfall that led the way and proved there was an opportunity to grasp.
Sterling had already become a sweet spot for corporates seeking duration, thanks to the imbalance between supply and demand. That imbalance was even more pronounced for hybrids given how long it had been since one was priced in sterling. Indeed, you had to go back to June 2021 to find the last one. And the issuer? Vattenfall.
Ahead of its latest deal, the Swedish state-owned utility had about €2bn-equivalent of hybrid stock across a number of currencies. The new issue’s limited size, however, lent itself to sterling as the preferred option, given that in the euro market, for example, Vattenfall would have been consigned to issuing a sub-benchmark transaction or maybe increasing an existing line, with all the pricing ramifications that would have entailed.
Marketing began at the 7.25% area, with leads Barclays, NatWest Markets and RBC Capital Markets putting fair value at about 7%. But an order book that was more than £800m at the guidance level of the 7% area meant they were able to land the deal with a six handle, pricing with a 6.875% coupon at par. For those with an eye on the spread versus government paper, it came 305.9bp over the 0.125% January 2028 Gilt.
Aside from the return on offer, the bond’s green label also played its part, with one person involved describing it as “the type of green that everyone likes”. The company's framework has a dark green rating from Cicero and a governance score of "excellent".
Vattenfall is one of the largest providers of fossil fuel-free electricity in Europe and has committed to phasing out coal as fuel in all its heat plants by 2030.
The combination of those green credentials and the yield served it well in a sterling market starved of supply, coming at a time when it was the sole corporate in the currency amid a sea of euro paper. It also ticked a box for those of a nervous disposition on the ratings front, Vattenfall, sporting senior ratings of A3 (stable) and BBB+ (positive) from Moody’s and S&P, respectively, making for a Baa2/BB+ ranking at the hybrid level.
It might not have been the biggest of deals by any means, but it was one that identified an opportunity and prepared the ground for others to follow.
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