Hera S.p.A. should make **meaningful but not maximum** use of hybrid bonds over the next 18 months.

Key considerations:

- **Leverage has increased materially.** Noncurrent financial liabilities rose from about **€3.7bn to €5.7bn**, and total financial debt including current financial liabilities and leases is around **€6.4bn** at year-end 2022. Although cash is high at **€1.94bn**, adjusted gross leverage pressure is clearly higher after the large financing inflow in 2022.

- **Cash flow weakened sharply in 2022.** Operating cash flow fell from **€1.05bn in 2021 to only €35.7m in 2022**, largely due to a very large working-capital absorption. Free cash flow was strongly negative after capex, with investing cash outflow of about **€758m**. This points to funding pressure and a need to protect credit metrics.

- **Capex intensity remains significant.** Purchases of PPE and intangibles totaled about **€710m** in 2022, up from about **€589m** in 2021. As a regulated multi-utility, Hera is likely to continue investing in networks, environmental services, energy transition, and infrastructure. Hybrid capital would help fund this without fully burdening adjusted debt.

- **Business risk is comparatively supportive.** Hera is a large Italian multi-utility with substantial regulated/utility-type activities. Under S&P’s regulated utilities framework, this should support relatively stable business risk compared with merchant energy companies, although 2022 working-capital volatility and energy market disruption reduce comfort.

- **Profitability and earnings are resilient but under pressure.** Operating profit declined from **€612m to €534m**, and net profit attributable to owners declined from **€334m to €255m**. EBITDA-like cash generation before working capital remained around **€1.2bn**, which is supportive, but the reported cash conversion deterioration is a concern.

- **Hybrid issuance would likely improve adjusted leverage metrics.** Under S&P hybrid methodology, eligible hybrids can receive equity credit up to the 15% adjusted capital cap. Given Hera’s leverage increase and capex/funding needs, some hybrid issuance has a clear rating-supportive rationale.

- **But maximum use is not warranted.** There is no evidence of transformational M&A, existential refinancing stress, or a severe downgrade scenario requiring the full **15%** cap. Liquidity is also substantial, with nearly **€2bn** of cash at year-end. The company appears to need balance-sheet optimization, not emergency capital.

- **Market cost is less favorable than in 2020-2021.** Euro rates increased significantly in 2022, with 5Y–10Y swaps around **1.7%-1.9%**, and subordinated nonfinancial IG spreads materially higher. Hybrid coupons would likely exceed senior debt costs, so excessive issuance would raise funding costs.

Overall, Hera’s profile fits best with **moderate-to-significant leverage pressure and capex/funding needs**, where hybrid bonds would meaningfully improve adjusted credit metrics, but the situation does not justify moving to the full S&P cap. The most appropriate recommendation is therefore **7.5% of total adjusted capital**.

<answer>7.5%</answer>