The TENNNL 4.75 2042 issue affords the opportunity to capitalise on the Dutch state’s commitment to TenneT Netherlands

Recommendation on the TenneT Netherlands BV EUR 4.75 2042 green issue: Buy

We are axed to offer the TENNNL 4.75 2042 green issue

This unguaranteed issue offers investors attractive carry versus state-guaranteed issues, while its 3.8% yield and maturity should appeal to institutional investors

Key investment considerations:

• TenneT Holding BV senior bonds were novated to TenneT Netherlands BV in September.
• Of key importance, the unguaranteed bonds benefit from a cross-default with the AAA rated state guaranteed bonds.
• We view an approach that values TenneT Netherland’s unguaranteed bonds largely based on their ratings as too conservative, as we believe it fails to reflect the full value of the cross default, dominance of guaranteed bonds in the TenneT Netherlands perimeter and this entity’s 100% ownership by the Dutch state, which reflects its strategic importance to the Netherlands.
• We accordingly view the value of the unguaranteed bonds as higher than their credit ratings would imply. We view a spread pick of 35bp or more versus the curve of the state guaranteed issues as attractive.
• Dutch state’s investment policy for corporates ranks as an additional soft support for ratings stability. Investors in the senior bonds of Dutch utilities owned by the state can take comfort from the Netherlands’ policy of targeting a minimum rating of A3/A- for corporates owned by the Dutch State.
• TenneT Netherlands faces a super cycle of investment. Given the state’s decisive actions aimed at securing funding for the large level of investment required in the next decade at economically attractive levels, then a significant downside scenario for the unguaranteed bonds would appear very unlikely.
• We believe management may be tempted to simplify TenneT’s structure moving forward. TenneT currently has in place a complicated debt structure, with debt at the TenneT Germany, TenneT Netherlands and HoldCo levels, while management has plans to issue hybrids at the OpCo level, in addition to the hybrids currently sitting at the TenneT Holding BV level. On top of this, TenneT Netherlands has both state guaranteed and unguaranteed senior bonds populating its capital structure.
• We accordingly see scope for management to consider tendering for the unguaranteed TenneT Netherlands bonds in the future to reduce complexity. We note that a sizeable minority stake sale of TenneT Germany to the German state via KfW could secure proceeds to support such a buyback, depending on the structure of any deal struck