Terna is a regulated electricity transmission utility with a strong regulated business profile, large strategic asset base, and stable cash generation. Its 2022 results show improving operating performance: revenue rose about 14%, operating profit rose about 11%, and reported net profit increased to €858 million. Operating cash flow was strong at €2.32 billion, materially above 2021, although partly helped by working-capital movements.

The main reason to consider hybrids is not business risk but capital structure and investment funding. Terna is capital intensive: 2022 capex on property, plant and equipment and intangibles was about €1.70 billion, and investing cash outflow was €1.86 billion. The company also carries substantial debt, with long-term borrowings of €8.42 billion, current long-term debt of €1.91 billion, and short-term borrowings of €0.44 billion at year-end 2022. The S&P Net Debt/EBITDA ratio of 4.35x and FFO/net debt of 17.24% indicate leverage is meaningful, though not distressed for a regulated network utility. The Moody’s adjusted leverage trend is improving, which argues against maximum hybrid use.

A key point is that Terna already issued hybrid bonds in 2022: €989 million of perpetual hybrid instruments are included in equity. This is a strong positive signal that hybrids are an accepted and useful part of the capital structure. Using year-end figures, total adjusted capital can be approximated as equity plus borrowings: equity of €6.17 billion plus debt of roughly €10.77 billion, or about €16.94 billion. Existing hybrids of €989 million represent about 5.8% of this capital base. Therefore, the company is already above the 3.75% level but below 7.5%.

Moving to around 7.5% would imply total hybrid content of about €1.27 billion, or only a moderate incremental issuance over the existing €989 million. This seems consistent with the next-18-month funding profile: there is high ongoing grid capex and meaningful refinancing, but not clear evidence of transformational M&A, acute downgrade pressure, or a need to maximize equity credit up to 11.25%-15%. The regulated utility profile and improving leverage trend reduce the case for aggressive hybrid issuance.

The cost environment is a constraint. Euro rates rose sharply in 2022, with 5-10 year swaps around 1.7%-1.9%, and the nonfinancial investment-grade subordinated/senior spread also widened. New hybrids would likely be more expensive than historic senior debt, so excessive issuance would raise funding costs. Still, because Terna already uses hybrids and has long-duration regulated assets, a moderate additional allocation is reasonable for rating flexibility and capex funding.

Overall, Terna should maintain and modestly expand hybrid usage, but not push close to the 15% S&P cap. The most appropriate option is 7.5% of total adjusted capital.

<answer>7.5%</answer>