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Quadgas makes grand return to PPs

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Quadgas, a gas asset and infrastructure investment consortium that sits above UK utility Cadent Gas, has sold $600m-equivalent of US private placements, in the first UK utility deal for more than six months.

Bank of America, MUFG, RBC Capital Markets and TD Securities arranged the deal for Quadgas, which is rated BBB+ by S&P. There was an initial target of £250m ($327m), with tenors ranging between 10 and 20 years. Several PP investors told GlobalCapital they were happy that a UK utility decided to enter the market, as there has been a vacant pipeline since the start of the pandemic. 

“All markets are open to us,” said David Moon, director of treasury at Cadent Gas. “It comes down to a combination of pricing, flexibility and where you think you have saturation.”

According to market sources, there are a £100m 10 year tranche with a 2.85% coupon, a £206m 12 year with a 2.92% coupon, a $44m 10 year dollar tranche at 3.26% and a €22m 12 year at 1.95% all of which have delayed funding out to March 2021; and a £100m tranche at 15 years with a 2.93% coupon that will be funded in January. The pricing was similar to what Quadgas was expecting, said Moon. 

The deal was predominantly sold to US investors, but there were investors from the UK and continental Europe in the order book too.

Quadgas swapped the euro and dollar tranches back into sterling. 

Cadent Gas is a regular issuer of PPs, with roughly $800m-equivalent in them outstanding at the operating company level, the regulated company Cadent Gas, and at the holding company (midco) level, which is Quadgas. 

“Cadent is well known by the market, and well liked: its stellar result didn’t surprise me,” said a banker away from the deal. 

PP not ready for transition

Earlier this year, Cadent Gas became the second company to issue a transition bond, after Brazilian beef producer Marfrig. Asked about whether he considered issuing a transition PP, Moon said: “We want a couple more transition bonds under our belt first.

“Whether people are ready for it in the private placement market, I’m not sure. My personal view is everything is moving towards sustainability, and everyone’s moving in the same direction, but at a different pace.”

The PP market has been comparatively slow to integrate sustainability. While the bond market, loans and other forms of private debt have embraced the trend, the institutional investors of the PP market have been slower to grasp its significance.

“We still got questions about sustainability [from the PP investors],” said Moon. “We were asked about the future of energy, but it was more to do with our future within energy.”  

Where’s the utility?

Over the past few years, UK utilities have accounted for around a fifth of the $15bn-$20bn that the country’s companies borrow each year. But Quadgas is the only UK utility to sell a PP since the pandemic first began affecting European capital markets in March.

The sector’s last attempt at a PP did not end well. In early March, UK electricity distributor Electricity North West (ENW) began marketing a PP via HSBC and Santander, holding roadshows in London and the US, offering investors their first chance to buy debt from its operating company. However, as the pandemic’s impact became clearer the deal was postponed, and no comeback date was suggested.

This paucity of deal flow is not due to PP investors lacking appetite for the sector, but down to the relative strength of the sterling bond market, which has proved more attractive for utilities over the past six months.

“Institutional investors have minimum coupon requirements at around 2%, and over the past six months that hasn’t made the PP market competitive versus the bond market — particularly at the opco level,” said a senior PP source.

A banker away from the deal agreed. “The spread differential between the opco and midco (holdco) level in sterling bonds has widened to roughly, or more than, 100bp, as opco has tightened faster than midco,” he said. “So it is easier for a company to sell PPs at the midco level and gain a pricing advantage over public bonds — which I guess is what Quadgas has taken advantage of.”