# Analysis of TERNA's Hybrid Bond Utilization

## Current Financial Position (as of 2023-01-01)

**Capital Structure:**
- Total Equity: €6,169.1M
- Long-term Borrowings: €8,416.7M
- Short-term Borrowings: €444.1M
- Current portion of LT Borrowings: €1,909.3M
- Total Debt: €10,770.1M

**Hybrid Bonds Outstanding:**
- Capital Instruments (Hybrid Perpetual Bonds): €989.0M
- These represent the equity instruments issued in 2022

**Adjusted Capital (Debt + Equity):**
- Total: €16,939.2M

## S&P Global Ratings Cap Analysis

S&P's maximum equity credit for hybrids: 15% of total adjusted capital
- Cap: €16,939.2M × 15% = €2,540.9M

**Current Hybrid Usage:**
- Current hybrids: €989.0M
- Percentage of cap: €989.0M / €2,540.9M = 38.9% of maximum allowable
- Headroom available: €2,540.9M - €989.0M = €1,551.9M

## Financial Performance Assessment (2022-2023)

**Profitability:**
- Net profit: €857.7M (strong)
- Revenue: €2,898.1M
- Operating profit: €1,333.5M
- Profit growth: 8.5% YoY

**Leverage Ratios:**
- Debt/Equity: 1.75x (moderate-high)
- Debt/EBITDA: ~6.0x (elevated; EBITDA ≈ €2,059.2M = Op Income + D&A)
- Interest coverage: ~10.9x (strong)

**Cash Flow:**
- Operating cash flow: €2,323.7M (strong)
- Capital expenditures: €1,704.7M
- Free cash flow: €619.0M

## Market Context (2022)

The swap curve data shows significant rate increases in 2022:
- 5Y swap: 1.726% (up from -0.264% in 2021)
- 10Y swap: 1.927% (up from 0.053% in 2021)
- Corporate spreads widened materially

This created a challenging financing environment, yet TERNA successfully issued €989M in hybrid bonds.

## Key Considerations

**Positive Factors for Increased Hybrid Usage:**
1. Significant headroom (€989M used of €2,540.9M cap)
2. Strong operational cash generation (€2.3B operating CF)
3. Stable, regulated utility business model
4. Investment-grade profile with strong interest coverage
5. Recent successful hybrid issuance demonstrates market access

**Limiting Factors:**
1. Elevated debt/EBITDA ratio (6.0x) already constrains leverage capacity
2. High capex requirements (€1.7B annually) for infrastructure investment
3. Rising interest rate environment increases cost of debt
4. Already significant dividend commitment (€595.8M in 2022)
5. Net leverage approaching limits for A-category ratings

## Optimal Hybrid Utilization

Given that:
- TERNA has substantial headroom under the 15% cap
- The company needs to fund significant infrastructure investments
- Leverage metrics are at the upper end of acceptable ranges
- Hybrids provide beneficial equity credit treatment while maintaining operational flexibility
- The company has demonstrated ability to access hybrid markets

A **balanced approach** is warranted. The company should utilize hybrids moderately to optimize its capital structure without overextending leverage. An additional €500-750M in hybrids (reaching 40-50% of the S&P cap) would:
- Strengthen equity ratios for rating agencies
- Provide cheaper alternative to subordinated debt
- Maintain financial flexibility
- Support infrastructure investment programs

However, given current leverage levels and capex pressures, utilizing the full 100% of the cap would be imprudent.

**Recommendation: 50% utilization**

This represents using approximately €1,270M in hybrids (50% of the €2,540.9M cap), an incremental €281M beyond current levels. This provides meaningful capital structure benefits while respecting financial prudence constraints.

<answer>50%</answer>