# Analysis of Ørsted A/S Hybrid Bond Utilization

## Company Profile

Ørsted is a Danish energy company, majority state-owned, operating primarily in offshore wind power across the UK, Germany, Denmark, Poland, the Netherlands, the US, and Taiwan. It falls under the **Unregulated Power and Gas** sector methodology, with some characteristics of renewable energy generation benefiting from long-term contracts (CfDs, PPAs, feed-in tariffs).

## Current Capital Structure & Hybrid Position

**As of December 31, 2022:**
- Total Equity: 95,532M DKK
- Hybrid Capital (within equity): 19,793M DKK (~€2.66B at ~7.45 DKK/EUR)
- Long-term Borrowings: 60,451M DKK
- Short-term Borrowings: 2,830M DKK
- Total Debt (gross): ~63,281M DKK
- Lease Liabilities: ~8,266M DKK

**Adjusted Debt estimate:** ~71,547M DKK (including leases)
**Total Adjusted Capital** (Equity + Adjusted Debt): ~95,532 + 71,547 = ~167,079M DKK

**Current hybrid as % of total adjusted capital:** 19,793 / 167,079 ≈ **11.8%**

So Ørsted is already near the 15% S&P cap on equity credit for hybrids.

## Key Financial Observations

### Leverage & Funding Pressure
1. **Massive capex program:** Construction in progress of 48,931M DKK, PP&E capex of 33,004M DKK in 2022. This is a capital-intensive offshore wind developer with a very large investment pipeline.

2. **Significant debt increase:** Long-term borrowings nearly doubled from 31,502M to 60,451M DKK, while short-term borrowings decreased from 19,493M to 2,830M DKK. Net borrowings increased substantially.

3. **FFO relative to debt:** EBITDA of 32,057M DKK is strong, but finance costs rose to 18,050M DKK (from 6,546M), reflecting the rising rate environment and increased debt.

4. **Negative FOCF:** Cash from operations of 11,924M DKK vs investing activities outflow of 17,912M DKK = negative free cash flow of ~6B DKK, funded by financing activities.

5. **Revenue growth strong** (132B vs 78B DKK), but partly driven by energy price volatility and hedging effects.

### Hybrid Activity in 2022
- Issued new hybrid capital: 3,693M DKK (~€496M)
- Repurchased hybrid capital: 1,945M DKK (~€261M)
- Net increase: ~1,748M DKK
- Coupon payments: 529M DKK

In 2021, Ørsted issued 7,327M DKK and repurchased 2,971M DKK in hybrids.

### Credit Quality Assessment
- Strong EBITDA margins (~24%)
- Very high capex intensity for offshore wind development
- Rising interest rate environment significantly impacts hybrid coupon costs
- State ownership provides implicit support
- The company already has substantial hybrid outstanding (~11.8% of adjusted capital)

## Rating Considerations

Ørsted is an investment-grade company (BBB+ from S&P historically). The company faces:

1. **Very high capex intensity** - offshore wind farms require massive upfront investment
2. **Rising leverage** - debt nearly doubled in one year
3. **Negative free cash flow** - ongoing for the foreseeable future during construction phase
4. **Rising interest rates** - swap curves went from negative to ~1.7-1.9%, making new hybrid issuance more expensive
5. **Already significant hybrid usage** - at ~11.8% of adjusted capital, close to the 15% cap

## Cost Considerations

With EUR swap rates rising from near-zero to ~1.7-1.9% in 2022, and subordination premiums of ~200bps for non-financial IG hybrids, new hybrid coupons would be in the 3.5-4.5% range (or higher). This compares to their existing hybrid portfolio which likely carries lower legacy coupons. The incremental cost is meaningful but not prohibitive given the equity credit benefit.

## Conclusion

Ørsted faces a situation where:
- **Very high capex intensity** with a transformational offshore wind build-out
- **Significant and rising leverage pressure** (debt nearly doubled)
- **Negative free cash flow** expected to persist
- **Investment grade preservation** is important for project financing and competitiveness
- **Already at ~11.8%** hybrid as % of adjusted capital
- The company has been **actively managing its hybrid stack** (issuing and repurchasing)
- Rating preservation is **strongly dependent** on maintaining the equity credit from hybrids
- Going to 15% would add marginal room (~3.2% more of adjusted capital, ~5.4B DKK or ~€720M)

The company clearly needs to maintain its hybrid program near the maximum to support its credit profile during this massive capex cycle. However, it's already close to the cap. The question is whether to maintain/top up to the maximum 15%.

Given the very high capex intensity, significant leverage pressure, and the importance of maintaining investment grade during an enormous offshore wind buildout, combined with the fact that Ørsted is already near the cap and has been actively issuing hybrids, the appropriate recommendation is to utilize close to the maximum.

The case aligns most closely with the **11.25%** guideline (high capex intensity, significant leverage pressure, IG preservation dependent on capital structure optimization) or even **15%** (transformational capex program, material downgrade risk without hybrid support). Given they're already at ~11.8%, topping up to 15% makes sense but the incremental issuance is relatively small. The recommendation should reflect the optimal *target* level.

Given the transformational nature of the capex program, the already-high utilization, and the need to preserve investment grade ratings, I recommend **15%** as the target.

<answer>15%</answer>