# Analysis of Hybrid Bond Recommendation for Iberdrola SA

## 1. Company Profile and Business Context

Iberdrola is a major integrated utility with significant regulated (networks) and unregulated (renewables, generation) operations. It operates across multiple geographies (Spain, UK, US, Brazil, Mexico, etc.) providing regulatory and geographic diversification.

## 2. Current Capital Structure and Existing Hybrids

Key observation from the equity statement: There is a line item **"Devengo De Intereses De Obligaciones Perpetuas Subordinadas"** (Accrual of interest on perpetual subordinated bonds) of -€169M in FY2022 and -€155M in FY2021. Additionally, **"Emision De Obligaciones Perpetuas Subordinada"** shows €2,740M issued in FY2021 and €0 in FY2022. These perpetual subordinated bonds are hybrid instruments classified in equity under IFRS.

The hybrids appear within noncontrolling interests, as the €2,750M issuance in FY2021 was booked to NCI. Looking at NCI of ~€17.0B at end-2022, a portion of this includes hybrid bonds already outstanding.

Additionally, there are "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" (capital instruments with financial liability characteristics) of €576M non-current + €87M current = €663M total. These may be additional hybrid-like instruments.

**Iberdrola already has meaningful hybrid exposure in its capital structure.**

## 3. Leverage and Financial Position

**Total adjusted capital estimation:**
- Equity: €58,114M (end 2022)
- Financial debt (non-current): €36,129M (bank debt and bonds) + €2,287M (lease liabilities) = ~€38,416M
- Financial debt (current): €10,458M + €151M (lease) = ~€10,609M
- Total gross financial debt: ~€49,025M
- Approximate total adjusted capital: €58,114M + €49,025M ≈ €107,139M

15% of TAC ≈ €16.1B — so there's significant theoretical room, but Iberdrola already has hybrids outstanding (~€2.7B+ from 2021 issuance plus earlier issuances evident from the ongoing interest accruals).

## 4. Capex Intensity and Investment Needs

- Purchase of PP&E: €6,277M in FY2022
- Purchase of intangibles: €510M
- Other investments: significant
- Total investing cash outflows: €10,154M
- Operating cash flows: €10,443M
- **FCF is approximately neutral**, meaning the massive capex program is consuming virtually all operating cash flow

Iberdrola is in a heavy investment cycle (energy transition, renewables, network expansion). Construction in progress grew from €9.1B to €11.5B, and PP&E from €80B to €86.3B.

## 5. Debt Growth Trajectory

- Non-current financial liabilities grew from €37.2B to €44.2B (+€7.0B, or ~19%)
- Net new debt issuance: €14.8B issued vs €10.3B repaid = +€4.5B net
- This indicates significant refinancing needs AND growth funding needs

## 6. Credit Metrics Assessment

- FFO (approx): EBITDA €13.2B - interest ~€1.8B net - taxes ~€1.2B ≈ €10.2B
- FFO/Debt: ~€10.2B / €49B ≈ ~20.8% — this is in the medial volatility range for utilities but shows moderate pressure
- The company's leverage is increasing due to the capex program

## 7. Rating Considerations

Iberdrola is typically rated in the BBB+ range by S&P. The company faces:
- **Very high capex intensity** (~€10B+/year investing outflows)
- **Growing leverage** (debt up ~19% YoY)
- **Moderate but tightening credit metrics**
- **Existing hybrid usage** (already has ~€2.7B+ outstanding)
- **Need to maintain investment-grade rating** to support ongoing massive investment program

## 8. Cost Considerations

With swap rates rising sharply in 2022 (5Y at ~1.73%, 10Y at ~1.93%) and corporate spreads at ~1.09% for IG, plus the ~20bps sub-senior delta for non-financial IG, the all-in cost of hybrids would be approximately:
- Senior unsecured: ~3.0-3.1%
- Hybrid: ~3.2-3.3% (adding sub-senior delta)

This is a meaningful increase versus legacy debt costs but manageable given the financing environment. The incremental cost of hybrid vs senior is moderate (~20bps).

## 9. Assessment Against Guidelines

- **Very high capex intensity**: ✓ (€10B+/year)
- **Significant leverage pressure**: ✓ (debt growing 19% YoY)
- **Rating preservation dependent on capital structure optimization**: Partially ✓
- **Existing hybrids**: Already ~€2.7B+ outstanding
- **Material downgrade risk without hybrid support**: Moderate — the company is managing but leverage is trending adversely
- **Cost of hybrid**: Moderate incremental cost, manageable

The company has massive ongoing capex needs, growing leverage, and already uses hybrids. It needs continued access to hybrid capital to support its credit profile during this intensive investment cycle, but it already has a base of hybrids outstanding. The situation suggests continued/moderate expansion of hybrid usage rather than maximum utilization.

Given:
- Already has hybrids outstanding (~2.7B+)
- High capex intensity requiring continued funding diversification
- Growing leverage trajectory
- Investment grade preservation is important but not immediately threatened
- Room for additional hybrid issuance within S&P's 15% cap

This fits between the 7.5% and 11.25% categories. The very high capex intensity, significant debt growth, and need for rating protection push toward the higher end, but the fact that the company is currently managing (operating cash flows roughly cover capex) and already has hybrids outstanding suggests **11.25%** is appropriate.

<answer>11.25%</answer>