Let’s work through this step by step. --- ## 1. Nature of ENI’s Business ENI is a large integrated oil and gas company. The methodology that applies is **Oil and Gas Exploration and Production** (with some relevance to Unregulated Power and Gas for its renewables and retail activities). S&P would use the **standard volatility table** unless qualifying for medial/low under certain conditions. Given ENI’s size and diversity, let’s keep the **standard volatility** framework in mind. --- ## 2. Current Hybrids in Capital Structure From the data: - **Coupon payment on perpetual subordinated bonds**: €138m in 2022. - Equity movements show previous perpetual subordinated bond issuance and redemption activity. - This means hybrids are already part of the structure. Hence the starting point **is not zero**. --- ## 3. Adjusted Capital and Hybrid Limit - **Equity at end-2022**: ~€55.2bn. - **Adjusted debt**: Not explicitly given, but we can approximate from total borrowings + lease liabilities + other adjustments. - S&P cap = 15% of Total Adjusted Capital (Equity + Adjusted Debt). - If hybrids already exist, additional issuance headroom must consider existing hybrids. Given the €138m coupon, even if hybrids were €2–3bn, that’s well below 15% of total adjusted capital. --- ## 4. Financial Metrics & Leverage Considerations From P&L and balance sheet: - **FFO to debt** (approx): Cash flow from operations ~€17.5bn; total borrowings + leases ~€32bn → FFO/debt likely strong in 2022 given high energy prices. - Operating cash flow significantly increased in 2022. - Capex intensity is high (€7.7bn in 2022 just for PPE), with likely continued high levels for energy transition. - Profitability surged; net income from €5.8bn in 2021 to €13.9bn in 2022. Thus: - **Leverage pressure is moderate**, not severe. - Rating headroom is likely **solid in current conditions**, but cyclical downturn could tighten metrics. --- ## 5. Refinancing and Funding Needs - ENI’s short-term borrowings increased from €2.3bn to €4.4bn. - Dividends and buybacks were substantial (~€2.4bn buyback, €3bn dividends). - High capex for transition and exploration. - Funding needs appear **moderate to high**, but not transformational or emergency. --- ## 6. Cost of Hybrid vs. Cost of Debt - From market data: - IG corporate bond yields in euros were ~1.085% in 2022 (average). - Subordinated delta ~1.2% over senior. - Hybrid cost would be ~2.3% in 2022, which is **higher but not drastically** above ENI’s average cost of debt (likely between 1.5–2.5% based on its ratings and debt structure). - Hybrid issuance would **slightly increase** blended cost of debt. --- ## 7. Overall Assessment - ENI **already uses hybrids** as part of its capital structure. - Metrics are strong currently, but given the volatile industry, some hybrid support helps preserve rating through cycles. - Needs are **moderate**, not extreme. - Hybrid issuance would be for **mild optimization and flexibility**, not for distress prevention. - This aligns closely with the **7.5%** or **3.75%** guidance. Given existing hybrids and the moderate need, 7.5% is the most appropriate: meaningful but not aggressive leverage improvement. --- 7.5%