Corporate Finance

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Hybrid Innovation at TenneT TenneT decided to acquire Transpower, a high voltage business which had previously belonged to E.ON, and for which the asking price was EUR885m. However, borrowing the full amount in the capital markets would have lowered the company’s A-range credit rating. After discussions with the State of the Netherlands, the owner of TenneT, the firm entered into a special arrangement with the Dutch government to secure an equity contribution, and also issued a hybrid bond, which was heavily oversubscribed. The author summarises the rationale for hybrid debt and provides advice to other corporate who contemplate issuing a hybrid bond.

Hybrid Innovation at TenneT

by Otto Jager, Group Treasurer, TenneT

TenneT is the high voltage grid operator of the Netherlands, with over 90% of revenues derived from regulated business. On 10 November 2009, TenneT announced the acquisition of the German high voltage grid of operator Transpower (formerly the high voltage grid of E.ON) for an agreed enterprise value of EUR885m. The acquisition creates Europe’s first cross-border TSO. In 2008, the company recognised that it was embarking on a period of expansion, and sought to introduce specialist financing experience into the team. As a result, Otto Jager joined TenneT as Group Treasurer in 2008 following a career in banking.

E.ON’s divestment of its high voltage business, Transpower, created a significant opportunity for TenneT to pursue its strategy for European integration of high voltage grids. The company had already established links with grids in Norway, Belgium, Germany and UK, but an international acquisition would be a major step in achieving its integration ambitions. However, it was immediately apparent that financing would be a hurdle to achieving this. In 2008, mergers and acquisitions had declined sharply, and deals that remained were difficult and expensive to conclude. To achieve the acquisition of Transpower, TenneT knew that it was likely to require up to EUR1bn in financing.

Raising capital

As a state-owned business, TenneT’s equity capital is owned by the State of the Netherlands, but its debt obligations are not guaranteed by the State. In line with Dutch government policy applicable to its corporate shareholdings, the company aims to maintain an A-range credit rating. The company could not simply borrow the full amount it required in the capital markets and maintain its rating, and therefore needed to strengthen its balance sheet through equity. TenneT’s senior management embarked on discussions with its shareholder regarding the supply of equity capital, but the timing of these discussions was inauspicious, with the country experiencing the effects of an economic downturn and a growing budget deficit. Consequently, the company entered into a special arrangement with the Dutch government which guaranteed an equity contribution equivalent to EUR300m from a foundation that holds funds on the company’s behalf. In addition, the company issued a EUR500m hybrid bond, providing 50% ‘equity credit’ from a rating agency perspective, to enable the company to maintain its rating. This provided the majority of the financing required to cover the EUR885m acquisition price and the remainder was financed through debt.

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