# Analysis of Hybrid Bond Suitability ## Entity A: ENEL SpA **Sector & Profile:** Large European utility/energy company (regulated/quasi-regulated) based in Italy. This is a classic "Strongly Suitable" sector for hybrid bonds. **Existing Hybrid Bonds:** ENEL already has significant hybrid bonds outstanding (€5.567 billion in "Equity Instruments Perpetual Hybrid Bonds" as of Dec 2022). They issued €3.181 billion in hybrids in FY2021 but issued **zero** new hybrids in FY2022. Coupon payments on hybrids increased from €71M to €123M, reflecting the larger outstanding balance. This suggests potential refinancing needs could be emerging depending on call dates. **Credit Metrics:** - Total equity: €42.1B; Total assets: €219.6B - Long-term borrowings increased significantly from €54.5B to €68.2B (+25%) - Short-term borrowings also increased from €13.3B to €18.4B - Net profit declined from €3.86B to €2.92B, with significant losses from discontinued operations (-€2.3B) - Operating profit improved from €7.55B to €11.19B - Operating cash flows declined from €9.9B to €8.7B - Leverage appears to be deteriorating with significant debt increases **Key Observations:** - Debt levels are rising substantially, suggesting deteriorating credit metrics - Already an established hybrid issuer with track record - Strong regulated utility profile - No new hybrid issuance in 2022 despite rising debt could indicate a near-term need - FFO-to-debt likely under pressure given rising debt and stable/declining cash flows ## Entity B: Électricité de France (EDF) **Sector & Profile:** French state-controlled electric utility - quintessential "Strongly Suitable" profile for hybrids. **Existing Hybrid Bonds:** EDF already issues perpetual subordinated bonds. In FY2022, they issued €994M in subordinated liabilities/convertible instruments and paid €606M to holders of perpetual subordinated bonds. In the equity statement, they show "Issuance and Redemption of Perpetual Subordinated Bonds" of -€1,025M (net redemption). They also show "Payments on Perpetual Subordinated Bonds" of -€606M. **Credit Metrics - CRITICAL:** - **Massive net loss of -€18.225 billion** in FY2022 (vs. +€4.828B in 2021) - Operating profit went from +€5.225B to **-€19.363B** - EBITDA equivalent went from +€18B to **-€4.986B** - Operating cash flow turned deeply negative: **-€7.425B** (vs. +€12.6B in 2021) - Total debt increased dramatically: non-current financial liabilities from €56.5B to €71.1B; current financial liabilities from €45B to €71.8B - Equity declined from €62B to €46.6B - Had to issue €3.25B in new equity and €34.2B in new borrowings **Key Observations:** - EDF is in severe financial distress with catastrophic deterioration in all metrics - Credit metrics are under extreme pressure - rating downgrade risk is very high - However, EDF was undergoing nationalization by the French state (2022-2023), which complicates market access for hybrid bonds - The severity of the financial deterioration makes hybrid issuance urgent from a credit metric standpoint - Already has existing hybrids with payments/coupons due - Net redemption of subordinated bonds in 2022 suggests potential refinancing need **Complication:** EDF was being taken private/nationalized in 2022-2023, which would actually reduce the need for market-based hybrid issuance. This significantly reduces the practical suitability for a bank to originate a hybrid bond. ## Entity C: Veolia Environnement **Sector & Profile:** Environmental services (water, waste, energy) - regulated/quasi-regulated infrastructure-like business. "Strongly Suitable" sector. **Existing Hybrid Bonds:** Veolia has "Deeply Subordinated Securities" (hybrids) of €3.496B as of Dec 2022. During FY2022: - Contributed €1.624B of hybrid debt from Suez SA acquisition - Repaid €500M of hybrid debt - Paid €88.3M in coupons - Net no new issuance of own hybrids (€0 in "Proceed on Issue of Deeply Subordinated Securities") **Credit Metrics:** - Revenue nearly doubled from €28.5B to €42.9B (Suez acquisition consolidation) - Net profit improved from €555M to €998M - Operating cash flow improved from €3.15B to €4.15B - Total assets jumped from €53.1B to €73.3B (Suez) - Non-current financial liabilities nearly doubled from €10.5B to €19.7B - Equity increased from €12.8B to €14.9B - Leverage is elevated post-Suez acquisition **Key Observations:** - Post-Suez acquisition integration means elevated leverage - Inherited Suez hybrid debt (€1.624B) which will eventually need refinancing at Veolia level - Growing business with improving profitability - Significant M&A-driven leverage increase makes hybrid issuance attractive for credit improvement - The Suez hybrids inherited may have call dates approaching - Hybrid issuance could materially improve adjusted leverage metrics post-acquisition - Strong regulated/infrastructure profile ## Ranking Rationale **1st Priority - Entity A (ENEL):** - Established hybrid issuer with €5.6B outstanding and rising costs - No new issuance in 2022 despite significantly deteriorating leverage (debt up ~€19B) - Deteriorating credit metrics with rising debt and declining profitability - Operating cash flows declining while capex remains high - Strong regulated utility profile with clear market access - Hybrid refinancing/new issuance most urgently needed to support credit metrics - The combination of deteriorating metrics, existing hybrid program, and no 2022 issuance makes this the highest priority **2nd Priority - Entity C (Veolia):** - Post-Suez acquisition leverage is elevated - Inherited Suez hybrids that may need refinancing at Veolia level - Strong strategic rationale for hybrid issuance to optimize post-M&A capital structure - Improving operational performance provides good backdrop - Regulated/infrastructure profile supports strong suitability - Active in hybrid market but may need fresh issuance to manage leverage **3rd Priority - Entity B (EDF):** - While the financial deterioration is the most severe and would normally create the highest urgency, the ongoing nationalization by the French state fundamentally changes the picture - State ownership/nationalization reduces the need for market-based hybrid financing - Already issued equity (€3.25B) suggesting state support - Net redemption of subordinated bonds suggests they're managing existing hybrids - Market access for a company being taken private is limited/irrelevant - Despite being the most "credit-stressed," the practical opportunity for a bank to originate a hybrid is lowest A,C,B