Several corporate issuers come to the market with debut ESG bonds

The new KPN hybrid deserves a greenium

Dutch telecommunications company KPN came to the market last week with a debut green hybrid bond. While KPN’s senior bond in SLB format trades at a small greenium to its closest peer bonds (issued by Vodafone), we note that the new hybrid landed at 22bp of pick-up to the interpolated Vodafone hybrid curve.

The use of proceeds on the new KPN hybrid will largely go into expanding the fibre optics (a.k.a. fibre) fixed line connections. Fibre optic produces nearly 37% less carbon emissions than for example traditional coax cable internet connections, according to a study on a sample of German homes. Closest peer Vodafone has no pure fibre internet offering, it still uses coax cable with bits of fibre. But also lower rated Telefonica is less advanced than KPN in the monetization (hence use) of fibre optics. This can be seen in the chart below, which shows the percentage of fibre internet revenues against fixed line revenue and total revenues of the issuers as per latest financial filings. Only BT has a (slightly) higher penetration of fibre internet than KPN. Still, against Vodafone, the KPN bond stands out in terms of green benefits.

Anglo American SLB fails to confirm investor appetite for transition businesses

In the metals & mining space, EUR denominated investors have for quite some time preferred pure play miner Anglo American over the more diversified miner and trading characteristics of Glencore. This comes despite Anglo American’s one notch lower credit rating of BBB2 composite vs Glencore’s BBB1 composite. Perhaps Glencore’s trading business (through which it traded over USD100bn of energy products last year) and involvement in more scandals (as reflected in its high risk ESG Risk Rating by Sustainalytics) play an important role in lower investor appetite in Glencore. This makes investors more comfortable pursuing Anglo American, despite Anglo American’s lower diversification and smaller size. The chart below shows the difference in spread between Anglo American and Glencore bonds in the 2025 maturity. This gap persists till today, despite warnings flagged by various US metal makers that demand for steel is slumping across a variety of end-products. Given that Glencore is also diversified in energy trading, it has more immunity than pure play miner Anglo American to the warnings flagged by the metal makers.

Strangely, in the USD bond market Anglo American spreads trade wider to Glencore. The issuer perhaps felt that it could put this higher appetite by EUR investors to work in a longer maturity and even went for an SLB format for a 2029 bond, the first time for the issuer and also for a mining company in the EUR IG bond space. KPI’s were related to CO2 reduction (scope 1 and scope 2), reduction in fresh water extraction and off-(mining)site job creation.

According to our investor survey we note that ESG bond investors are (desperately) searching for transition company bonds, but in reality appetite seems weak judging by the new Anglo American SLB deal. Step ups were huge ranging from 40 to 120bp depending on missing 1 or all three targets (remember a couple of months ago we were seeing 12.5 to 25bp step ups. In fact, 80% of the EUR SLBs outstanding make use of a 25bps step-up). A week earlier, the Enel and Henkel offered much smaller step-ups (albeit in the case of Enel for a potential longer penalty horizon could be in play if Enel were to continue to miss targets after the test date). The SPO on the KPI’s was carried out by ISS ESG, which found the scope 1 and 2 reduction targets to be aligned with the 1.5 degree scenario of the Paris Agreement (although there is no Science-Based Targets initiative validation given also difference in methodology). There was limited evidence to properly assess the ambition level of the other two targets (abstraction reduction of fresh water in water-distressed region and off-site jobs creation for every on-side job).

The new Anglo 32’s SLB priced 28bp outside of the 9.5y duration Glencore, and if we had to take the 48bp tighter spread on the euro Anglo American 1.625% 2026 vs the Glencore 3.75% 2026 on this 9.5y maturity it should have landed at roughly MS+150bp. Therefore, we calculate a whopping 75bp of new issue concession on the new Anglo American SLB. This deal was not a showcase of high investor appetite for sectors in transition, quite the opposite. Especially since there has been change in trend in Anglo American’s non-SLB bonds vs Glencore (i.e. they continue to trade at tighter spreads) we can rule out that it might have to do with the warnings flagged by steel companies. Let us therefore hope it does not discourage other issuers in transition industry preparing themselves for a SLB.

Amprion higher capex resulted in a benchmark against lower rating issuer

There were quite a few utility companies issuing bonds last week, but only Italian integrated player A2A and German high voltage grid operator Amprion came with ESG (green) offerings, both in green bond format. It was Amprion’s second public bond market deal (although we note that Amprion’s deal from last year is flagged as SSD format in Bloomberg).

Orderbooks were over 5 times the offering, while on last year’s offering they topped at 3 times. But UK/US transmission company National Grid ‘only’ paid 20bp of concession on a regular bond 10y deal 2 days before. On news site Global Capital we understood that Amprion was benchmarked against German DSO and retail operator E.On (see here). Admittedly, E.On has a well populated curve to serve as a pricing benchmark, plus it is also mostly composed by green issuances. But E.On operates distribution networks and does so in various countries (albeit with a focus on Germany). It also operates retail businesses, which buy and sell electricity and deliver a sizeable contribution to EBITDA. Hence, E.On is also usually seen more as an integrated utility company, rather than a regulated DSO/TSO. Amprion, like Eurogrid, is a fully regulated company and therefore both can be considered close peers. On top of that, E.On is also rated one notch lower by Moody’s, while both Eurogrid and Amprion carry the same BBB1 composite rating.

However, Eurogrid’s lower capex requirements could have been the driving factor behind Amprion not being benchmarked against its closest peer. Eurogrid is set to spend roughly EUR 5.6bn in capex over the course of 2022-2026 (5y), while Amprion will spend a whopping EUR 28bn over the course of 2022-2031 (10y). Amprion’s higher capex ticket size comes presumably from the larger industrial activity in West Germany where Amprion operates. Amprion starts the higher capex assignment with roughly 16% of FFO/ND, slightly above Eurogrid’s 12% FFO/ND position (as of FY21). Still, Moody’s expects Amprion to come out with high single digit FFO/ND (between 6% and 8%) once the high capex gets underway. Eurogrid’s FFO/ND is set to land in the 10-11% range, therefore a considerable difference and the main reason why the new Amprion deal was benchmarked against one notch lower rated E.On. Still, should Amprion’s FFO/ND remain in the high single digits as expected, its one notch better credit rating still makes it a better proposition than E.On.