US headwinds present an attractive entry point into Orsted bonds

Recommendation on Orsted A/S senior EUR bonds: Buy

We are axed to offer the ORSTED senior issues across the curve

We see >2pts of potential upside for the ORSTED 4.125 2035s in the next 6 months

• Orsted’s exposure to the US has proven very costly from a financial, ratings and bondholder perspective.
• In recent years, Orsted bonds and hybrids have moved from being amongst the most expensive to being amongst the cheapest across the European Utility IG universe, despite the name’s GRE status.
• US-related headwinds continue to present the main risk to the Orsted credit. The Trump administration has actively disrupted the US offshore wind industry. It surprised the market when it issued a stop work notice on Orsted’s Revolution Wind in Q3, despite the project being 80% complete, albeit the order was subsequently lifted as Orsted was granted a preliminary injunction.
• Sunrise Wind was the trigger for the rights issue: Orsted’s strategy of taking on more upfront project risk than many of its peers, before farming down its exposure, left it vulnerable to the radical change in US policy towards offshore wind this year. This issue left it unable to sell a stake or raise non-recourse project finance in respect to Sunrise Wind, which is c.35% complete.
• The Danish state confirms its commitment to Orsted. Orsted’s DKK60bn (€8bn) rights issue has materially strengthened the company’s balance sheet. It was >99% subscribed for, led by its controlling shareholder, the Danish state, which holds a 50.1% stake, and Equinor, which holds a 10% stake.
• The rights issue more than covers Orsted’s incremental funding requirements from its full ownership of Sunrise Wind and the impact of the Revolution Wind stop work order, while allowing Orsted the financial flexibility to pursue investment opportunities in ‘select core markets’.
• A successful farm down of the Hornsea 3 UK wind project by year end represents a potential positive catalyst for bonds: The FT reported late last month that Orsted was in talks with Apollo in respect to a 50% stake sale.
• Commitment to IG remains. Orsted, backed by the Danish state, showed its willingness and ability to support the group’s IG status. This is not only welcome but rational given the nature, size and scale of projects Orsted undertakes; we view a strong credit worthy counterparty as a competitive advantage and arguably a necessity in the offshore wind industry.
• Our Buy recommendation reflects an attractively skewed risk-reward trade-off in the near term. Orsted senior bonds now rank as amongst the cheapest across the European Utilities sector; they currently trade close to crossover levels, taking into account the beta of the Utilities sector, with the Orsted 2035 issue offering a compelling yield of close to 4%.