TenneT moving up the ratings curve
Recommendation: Positive on TenneT senior unsecured bonds over a three to six month investment horizon.
While the market for trading TenneT bonds is currently somewhat disrupted, we see scope for TenneT bonds to outperform AAA rated SSA peers in the event they secure a AAA rated guarantee by the deadline of 29th September, which we view as a likely outcome, as we view them to be offering an attractive level of carry in the context of this particular investment universe. We would also expect TenneT bonds to eventually outperform in the event of them not securing the guarantee by the deadline, taking into account the attractive level of the guarantee alternative fee its bonds would stand to receive and our assumption that in this scenario TenneT would target A3/A- ratings as a minimum. Our investment horizon for this recommendation is three to six months.
Key points to note:
The consent solicitation was successful. All invited TenneT bond issues consented to a modification in terms and conditions, allowing them to be moved to the level of TenneT Netherlands. The focus is now upon how TenneT bond valuations compare to those of SSA peers, assuming they secure a state guarantee. If they fail to secure a guarantee, then owners of bonds which tendered by the Early Instruction Deadline will receive compensation through the guarantee alternative fee.
Implications of receiving a AAA rated state guarantee: This will trigger a movement in certain cases of state-guaranteed TenneT bonds from corporate portfolios to SSA / government-related portfolios. From an index perspective, then we see more significant implications for portfolios which are benchmarked to the iBoxx index.
Implications of not receiving a state guarantee by 29 September: Positive, with almost all eligible TenneT bonds expected to benefit from a valuation perspective based on our analysis, as the guarantee alternative fee would more than offset price declines due to failure to secure the guarantee, given our assumption that TenneT would thereafter target, as a minimum, A3/A- ratings. We view the TENN 0.875 2035, TENN 1.5 2039 and TENN 1.125 2041 issues as particular attractive in this scenario.
‘Eligible’ TenneT bonds offer value, if one assumes they will receive a state guarantee: We have considered relative value of TenneT bond issues in comparison to AAA-rated SSA peers, as well as highly rated corporates, which together serve to validate our view that TenneT issues offer fair to attractive value. The TENN 0.875 2035 and TENN 2.125 2029 issues rank as particularly attractive versus both AAA rated SSA and corporate peers on both a z-spread and ASW basis.
Value relative to the underlying sovereign, assuming the guarantee is secured: The majority of TenneT issues offer an implied spread of >45bp over the Dutch sovereign, which we view as a very attractive level, given the sovereign will offer an irrevocable and unconditional guarantee to eligible TenneT bonds 1.
All TenneT benchmark issues are green, which should appeal to ESG-focussed portfolios. Most of the bonds of SSA peers presented in this publication are not.
Bond buyback potential: This in our view will be linked to the size of the stake in TenneT Germany sold, after taking into account the near term TenneT-related equity funding commitments of the Dutch state. In such a scenario, we assume short dated issues, such as the TENN 0.125 2027 issue, are a credible buyback target.
