Eesti Energia’s green hybrid bonds were oversubscribed four times. But are they really that green, financial experts ask.Photo: Liis Treimann
The issuance of Eesti Energia bonds is an admirable financial trick that allows for the budget deficit to be cleverly packaged. And electricity consumers will pay for the clever maneuver, according to financiers and market observers.
In early July, it became known that the subscription volume for Eesti Energia’s green hybrid bonds on the London Stock Exchange exceeded the issue by more than four times, meaning offers were received for more than 1.6 billion euros. Almost 200 investment funds around the world subscribed to the bonds, and two-thirds of the potential investors were from Europe, including Estonia, the company reported in a press release.
At the same time, not all experts are unequivocally positive about the new instrument, successfully “sold” by the state company to investors.
Alar Voitka: Minister finances state budget deficit at 7.9% per annum
Alar Voitka, partner at Valuation Services OÜ, expresses his opinion on the meaning of the new hybrid bonds.
Eesti Energia issues hybrid bonds! What is this trick?
Eesti Energia (with an investment grade rating of BBB-) issues 400 million euros of junk bonds (rated at only B-), the interest on which can be deferred in case of difficulties and which have no strict obligation to repay. You pay when you find the money. Naturally, this means paying a significantly higher interest rate (it will be even higher in five years).
What is a hybrid bond?
A hybrid bond is an equity instrument that allows a company to make significant investments without increasing its debt burden.
A hybrid bond is perpetual and has a slightly higher interest rate than a regular bond due to the higher risk from an investors perspective.
For what?
So that the loss-making Eesti Energia could reflect the 400 million euro subordinated loan taken as equity and thus finance the payment of gross dividends (net dividend + income tax) of approximately 92 million euros to the state budget, bypassing the resistance of the management board, but without irritating existing creditors.
So that the owner, that is, the state, can reflect this payment in the state budget as income, which, unlike a direct loan issued by the state, helps to postpone the reduction of budget expenditures, showing a slightly smaller budget deficit.
As a result, the Minister of Finance finances the state budget deficit at 7.9% per annum. Formally, the interest is paid by the monopoly state company, but in fact it is provided by the taxpayer-electricity consumer.
At the same time, I take my hat off to Eesti Energia and the consultants who were able to package these hybrid bonds as “green” in conditions where the company needs about 350 million euros to build a new oil plant.
Villu Zirnask: Eesti Energia bonds remind us that financiers can turn a pumpkin into a carriage
Head of the Finantsuudised.ee portal Villu Zirnask.Photo: Jaanus Lensment
Eesti Energia’s 400 million euro hybrid bond issue with complicated terms is reminiscent of the Cinderella story, where the fairy temporarily turned the pumpkin into a carriage. The financiers turned out to be even more skilled than the fairy, their “carriage” often lasts longer than midnight, writes Villu Zirnask, head of Finantsuudised.ee.
Time will tell how things will go for Eesti Energia, but one thing is already clear – this issue could make the company’s CFO Marlen Tamme a candidate for the title of CFO of the Year. If someone thinks that there is irony in comparing it to a carriage, then that is true. Eesti Energia emphasizes that their bonds are green – the independent consulting company ISS Corporate Solutions issued a certificate of compliance with environmental criteria, and “the green bond status confirms that Eesti Energia is moving in the right direction on its green path.”
On the other hand, the company’s Q1 report shows that it produced 1,225 GWh of electricity, of which only slightly more than half, or 646 GWh (53%), was renewable energy. Environmental activists are also not happy with Eesti Energia’s liquid fuel production activities, which will soon be joined by a new shale oil plant if the court sides with the company.
In short: financiers’ skills at wrapping assets and liabilities in a manageable form have not rusted, despite the fact that they were heavily criticized for such tricks during the global financial crisis of 2008. The stories of financial advisers and bankers about how environmentally conscious they are now can be multiplied by a factor of less than one.
Hybrid bonds with similar terms were also issued at the beginning of the year by the Italian energy company Enel, which borrowed 900 million euros in this way, but at a significantly lower price than Eesti Energia (interest rate 4.875%).
Enel’s credit rating according to S&P is BBB, while Eesti Energia’s is one level lower – BBB-. S&P assigned both hybrid bonds a rating lower than the company’s overall rating – Enel’s is BB+, Eesti Energia’s is B+.
Source: www.dv.ee
