The long series of financial transactions that Italgas has successfully carried out over the last three years allowed the Company to achieve a well-balanced debt structure and bring the cost of debt – currently around 1% – to excellent standards. Over the period covered by the Strategic Plan 2019-2025, Italgas intends to maintain the financial efficiency achieved, leveraging on strong cash flow generation that will fund both organic growth and dividend distribution.
Italgas has recently carried some significant liability-management exercises on the bond market that lock-in new benefits in terms of financial management. Through the issue of the last 500-million euro bond, with a coupon of 1% and maturity up to 2031, the Company collected 650.7 million euro. These funds were used to repurchase two outstanding bonds for a total notional amount of 1.4 billion euro, respectively with 2022 and 2024 maturity. This combined liability-management exercise also contributed to extend the average maturity of debt while maintaining its cost competitive.
Starting from the IPO in October 2016, how could Italgas achieve the financial independence from Snam while maintaining a balanced debt structure and minimizing its cost at the same time?
To understand the reasons behind the results achieved through such financial optimization path, we examine each single step, until the most recent issue of December 2019, talking with Gianfranco Amoroso, Head of Finance, Planning, Control and M&A at Italgas.
How was the initial picture at the moment of the IPO, three years ago?
Our need in the beginning was to provide Italgas with an autonomous financial structure and put the Company in the position to repay the entire exposure that it had towards Snam. We worked to be prepared in advance, with the aim of achieving the subscription of a significant financing package by a pool of primary credit institutions, both Italian and international. In October 2017, we succeeded in obtaining a total of 4.3 billion euro loans.
How was this package composed?
The cornerstone was represented by a variable-rate Bridge to Bond loan, for a total committed amount of 2.3 billion euro; the Bridge was provided by a pool of 11 banks, with a 12-month maturity and an option of renewal from our side for additional 12 months. The same pool of banks also granted us two revolving credit lines at variable rates, for a committed amount of respectively 600 and 500 million euro, with a maturity of 3 and 5 years. Three of the 11 banks of the pool also provided three Term loans at variable rate, for a total amount of 500 million euro with a 3-year maturity. To the amount of the three loans we could also add the means provided by the European Investment Bank, the EIB, following the release agreed between Snam and Italgas of two EIB loans for a total of 424 million euro.
What could you do with this 4.3 billion euro funding?
In a very short time, on 11 November 2016, we could repay the 3.2-billion euro debt that Italgas Reti and its affiliates had towards Snam, whose controlling stake after the IPO had fallen to 13.5%. The following month, on 12 December 2016, we received a new EIB loan for 300 million euro, specifically dedicated to the Smart Metering project. In December 2016, we also reimbursed two out of the three Term Loans, for a total amount of 300 million euro.
When did you first start issuing corporate bonds?
In November 2016, after obtaining the rating from two agencies, Moody’s and Fitch, the first Company medium- and long-term issue program (Euro Medium Term Notes Programme) was approved, for a total amount of 2.8 billion euro. The program, valid through 31 October 2017, included the issue of one or more unconvertible bonds, to be placed with institutional investors operating in Europe and to be issued on one or more tranches.
Which were the goals of your financial strategy?
Our ultimate goal was to provide Italgas with a solid and efficient financial structure. In this perspective, we aimed to diversify the funding sources and reach an adequate balance between fixed and variable rate at competitive costs.
During 2017, we succeeded in reducing the cost of debt, increasing the average debt maturity and the share of fixed-rate debt, seizing the particularly favorable conditions in the financial market. In total, in 2017 Italgas issued bonds for 2,650 million euro as part of the EMTN program, which was later renewed for additional 12 months and incremented up to a total amount of 3.5 billion euro. Following those successful issues, already in April 2017, we could completely repay the variable Bridge to Bond loan of 2.3 billion euro. Overall, at the end of 2017 we achieved a 71% weight of fixed-rate liabilities and brought the leverage including affiliates around 61%; the liability-management exercises also allowed for a 25.2% reduction in adjusted net financial expenses, compared to the 2016 level.
Even in 2018, have you reimbursed part of the debt taken out in 2016?
Yes. At the end of January 2018, we re-opened the issue of the bond with a 1.625% coupon and 2029 maturity for an amount of 250 million euro; that allowed us to repay in advance, in February 2018, part of the term loan of 200 million euro. Our path towards debt structure optimization continued with a further extension of the average maturity and an increase of the fixed-rate portion of debt. By the European Investment Bank (EIB), we received funds that at 2017 year-end amounted to 784 million euro. In December 2017, we received by EIB a 20-year loan for 360 million euro, named Network Upgrade, destined to fund the extension and upgrade of the gas distribution network. At the same time, we reimbursed the previous EIB loan of 300 million euro. At the beginning of 2018, we then entered into an Interest Rate Swap contract, with 2024 maturity, which allowed us to switch the entire EIB “Gas Network Upgrade” loan from variable to fixed rate.
In fall 2018, the Italian sovereign bonds were downgraded by Moody’s Investor Services. How has this impacted your cost of debt?
The same agency, after reducing on the 23 October 2018 the Italian sovereign bonds from Baa2 to Baa3, stable outlook, took the same action also on Italgas long-term rating, downgrading it from Baa1 to Baa2, stable outlook, based on the attributed connection with the sovereign credit. On that occasion, Moody’s Investor Services underlined the reasons why they placed Italgas debt rating a notch above that assigned to sovereign bonds, namely strategic positioning, gas distribution leadership in Italy, regulated revenues, solid liquidity and limited exposure to the volatility of financial markets. The Board of Directors of Italgas renewed for the second time the EMTN program originally started in 2016, for a maximum countervalue of 3.5 billion euro, authorizing the relative issue of one or more bonds to be placed with institutional investors. Therefore, at the end of 2018 we had fixed-rate liabilities representing 86% of total debt, with a cost below that of our peers. The leverage also went further down, reaching a 59.6% level at the end of 2018.
When did the following opportunity to launch new issues come up?
The first available window was in July 2019, when we placed a 600-million euro bond with 2030 maturity and annual coupon at 0.875%, basically completing the EMTN program plafond. At the end of July, we also entered into an IRS contract with 2019 maturity that brought the EIB “Smart Metering” loan of 300 million euro to a fixed rate of -0.056%. In December, we seized new opportunities to extend the debt duration minimizing its cost. On 2 December 2019 we successfully placed a new fixed-rate bond, with 2031 maturity and 1% annual coupon; it represents the bond with the longest tenor ever launched by Italgas, with a demand three times higher the issued amount. The funds raised by issuing the new 2031 bond were dedicated to the repurchase, through a Tender Offer, of two bonds, with 2022 and 2024 maturity, whose outstanding notional amount total 1.4 billion euro. We completed this transaction on 10 December 2019, buying back a total of 650.7 billion euro.
What are your needs for the near future?
Financial strategy is one of the pillars of Italgas’ value generation. We do not have the need to find shot term solutions; we will follow what is written in the Strategic Plan. First of all, we want to preserve a solid investment-grade rating, with BBB+ by Fitch and Baa2 by Moody’s, because that is the premise to raise new funds on the market at competitive costs. Actually, our refinancing risks is very limited, as we have no real refinancing needs until 2022. The financial efficiency we pursued also ensures that in the Plan’s period the cost of debt will remain at the current, very low level. I can also add that as long as we keep moving in a low interest rate scenario, for sure we will maintain a high percentage of fixed rate debt. That does not mean that in the next years we will stop looking in a proactive way for all the opportunities that could make our debt structure even more efficient.