RWE is one of Europe's most impressive borrowers, having set records in various currencies and maturities. Rosie Irving outlines the company's recent funding adventures and finds out what it has planned for the coming months.
With a funding target of between Eu2bn and Eu2.5bn in both public and private issuance this year, Germany's RWE has become one of the European corporate debt market's biggest names following a three year period of rapid expansion through a series of ambitious acquisitions.
To match its busy takeover activities, the Essen-based utility has had a hectic year in the international markets, bringing a Eu2bn (approximate equivalent) exchange offering in June, launching a Eu1.2bn 15 year transaction in July and successfully maintaining its presence in the MTN market.
But RWE's most impressive transaction of the year so far is undoubtedly the Eu750m 30 year deal via ABN Amro, HypoVereinsbank and Morgan Stanley that was launched in January. Like the utility's £1.55bn multi-tranche bond of April 2002, the 30 year bond sent shockwaves through the market. Indeed, while the 2002 bond was the largest ever sterling corporate utility financing, the January 2003 deal broke records as the first 30 year utility transaction in euros.
The bond secured a spread of 115bp over mid-swaps, a level that surprised the lead managers. "We had reverse enquiry demand," said a member of ABN Amro's syndicate at the time. "We initially thought about a spread in the 120bp-125bp range, but based on strong demand we found we were able to bring it at the tighter level of 115bp over."
RWE's funding department is naturally pleased with the transaction, which followed a trailblazing 30 year transaction from Olivetti and allowed French rival Electricité de France to launch its own bond at that maturity. "RWE has had very positive experiences in 2002 and 2003," says a spokesman for the funding department.
"We were able to benefit in January this year from the upsurge in demand for 30 year bonds, and this general lengthening of the credit curve also supported our 15 year issuance in July."
RWE's net debt for this financial year is around Eu23bn. This includes positive euro and dollar exchange fluctuations.
However, bankers expect that any further issuance this year will be done through private placements in the MTN market - the company has a Eu20bn debt issuance programme in place that was redominated and increased from Eu15bn on March 31.
With a rating of A-/A1, above the average for a European utility credit, RWE is one of Europe's leading utility groups. It is also Germany's biggest integrated power group, with core interests in electricity, gas and water, following acquisitions in those markets. Among the company's conquests is the UK's Thames Water, which was bought in 2000, and American Water Works, an acquisition that was completed earlier this year.
Last year, the group bought the Czech Republic's energy provider Transgas, and UK energy group Innology, which prompted the exchange offering in June this year. Although these have been successful, further large acquisitions this year are unlikely.
As well as shining in the euro market, RWE is the second largest corporate issuer in the sterling market. In April 2002, the borrower debuted in the UK currency with the largest ever sterling corporate financing; a total sum of £1.55bn in a multi-tranche, euro and sterling denominated offering.
Bookrunners on the transaction described it as the most important deal in the utility sector so far that year. They had good reason to: it was the largest corporate deal outside of the automotive and telecoms sectors.
However, RWE is willing to dip into other currencies where possible and appropriate. "We will issue bonds in currencies to broadly match the group's assets," says the company spokesman. "If not available, we will use derivatives solely to provide the necessary cross-currency hedges for those assets.
"When issuing, however, we use consistent criteria such as relative pricing, execution and investor demand to determine the most effective issuance process."
Spread performance, and its knock-on effect on debt issuance, has been mainly positive this year. RWE says it is committed to giving investors fair value in its bonds and that, with minor exceptions, "has been the case for all our bond issuance".
"This year has been no different and investors have benefited from spread appreciation in major transactions in 2003," it says.
And the group acknowledges that investors play an integral part of the process, rather than just being the end consumers of bonds. "Because of our willingness to meet with investors and credit analysts, we provide a first-class investor relations department," the official continues. "This covers equity and fixed income and a transparent corporate communication policy, so RWE has been able to achieve a considerable number of corporate firsts."
Since the launch of its inaugural MTN programme in March 2001, RWE has been innovative and opportunistic in its approach to the capital markets, having completed a number of deals it considers funding achievements.
These firsts include the first 15 year utility bond in April 2001, the largest ever sterling corporate financing and the 30 year utility bond both mentioned above, and private MTN issuance in eight different currencies.
Long term relationships
When it comes to relationship banking, RWE believes that terms have changed over the past year. "Unquestionably, banks have become much more sensitive to their needs for a reasonable rate of return on credit," says the spokesman. "In some ways this is beneficial to the client. It encourages focus by marketers on value added and value adding services, rather than offering all sorts of services, some of which are not core competencies to the bank."
However, RWE does warn that the recent focus on credit provision by banks could, in some cases, go too far to the detriment of long standing relationships. "It means that banks may only consider those services which are the highest fee earners and miss the point of building longer term relationships which pay off in the medium and longer term."
So what next for the group in its role as a borrower? "Over the past three years, RWE has become a much more mature issuer and is generally seen as the benchmark issuer in the European utility sector," says the spokesman.
"That means we must constantly keep abreast of investors' requirements when investing in bonds. In addition, we must try to ensure that our existing portfolio of bonds trades successfully and that provides spread stability and value."