By Gavin Madson
Last week Origin Energy (Origin) announced a €500m hybrid. The issue received ‘high equity’ treatment by ratings agency Standard and Poor’s (which rated the issue four notches lower than the company’s corporate rating).
The ‘high equity’ treatment means that S&P will treat the issue as equity in its calculations of credit metrics. The high equity treatment is driven by a number of factors including:
- Mandatory deferral of interest for up to five years (if the corporate rating – not the hybrid rating - falls below investment grade)
- Long dated maturity – theoretically the hybrid’s maturity is 2071, however the first call date is 2018
- 25bps step-up after 10 years.
The hybrid offers a strong coupon of 7.875% for investors.
This issue follows a similarly structured hybrid released last year from Santos Limited (Santos) which initially raised €700m followed up by a further €300m raised subsequently.
Both Origin and Santos are undertaking major coal seam gas (CSG) to liquefied natural gas (LNG) projects in Gladstone which include significant capital programs which can be expected to stretch the respective companies’ balance sheets until construction is completed in 2014/15.
In response to the upcoming capital requirements, both companies have looked to raise funds from a number of avenues. Origin, for example, has raised $2.3bn in equity, syndicated loan facilities of $2.15bn, a US$350m bank debt facility, and finally the current €500m hybrid issue. The company has also ‘sold down’ equity positions in the project to major customers, as is the norm in the oil and gas industry.
The CSG-to-LNG projects in Gladstone (there are four major projects in total) continue to be looked upon favorably by both equity and fixed income investors as Asian demand for cleaner gas fuel (as opposed to traditional coal and oil fuel) for electricity generation continues to outstrip new supply, underpinning both strong gas pricing and the projects themselves.
The natural dynamics of the oil and gas sector also lends itself to fixed income investor protection due to the relative ease of divesting project stakes as sale prices are ultimately driven by commodity pricing and proven volumes rather than any more difficult valuation concepts like goodwill.
Speak to your FIIG dealer if these hybrid offerings are of interest.
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