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European energy: the freeze is coming

Woman feeling cold covered with warm blanket at home

RWE printed debt this week, but the next five months are going to see goodwill towards credits in the sector deteriorate

German energy utility RWE got a bond away this week, sparking hope that investors can put an impending energy crisis in Europe to the backs of their minds for now. This good sentiment towards the sector will not last the winter.

RWE sealed a €1.25bn bond. The issuer had garnered €3.3bn of orders before books were reconciled, so investors were clearly keen on the credit, but the bonds are just three years in maturity and paid what looked to be a 20bp new issue concession. This suggests that, while they are keen, investors want a bit of honey to sweeten any deals with a whiff of Russian gas about them.

Rightly so, too. Europe’s energy sector, and Germany’s in particular, is facing a torrid time. Before the invasion of Ukraine, Germany took a little more than half of its gas from Russia. In June, Russian state-owned Gazprom slashed its flows to Germany through the Nord Stream 1 pipeline by 60%.

One German utility, Uniper, is already facing insolvency. The company posted €12.3bn of losses for the first half of 2022, and has received billions in bail-out funding from the German government.

Energy rationing is a real possibility in Germany this winter. Under EU law, private homes and critical infrastructure such as hospitals will be able to keep the stoves burning, while non-critical businesses could see their gas supply pulled.

German chancellor Olaf Scholz last week pledged that the government will “do everything to help citizens” get through the crisis. Add to this the windfall taxes being discussed across Europe, plus people’s growing unrest about freezing this winter — just as some energy companies reveal huge profits — and this is already something of a social powder keg.

With no full-time dedicated European Union corporate bond buying programme pumping new money into the sector and keeping spreads down, high grade corporate bond investors will have to deal with the full effects of political risk this winter, as well as the energy crisis.

This week was good for RWE printing a deal. But in less than six months, even a 20bp concession and a three year maturity might seem aspirational for borrowers from the sector.

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