Utilities See Record Low Borrowing Costs Amid Global Growth

Strategic Insights -

Rising profits and shrinking loan losses have left European and U.S. banks with a surge in lending opportunities, contributing to record-low borrowing costs for utilities. German energy giant E.ON is among the beneficiaries, with plans to pay for the acquisition of Spanish utility Endesa using debt. The deal, which could be the world's largest corporate loan, has sparked a wave of mergers and acquisitions in the industry.

Key Takeaways:

  • E.ON's cash bid for Endesa is worth €29.1 billion, or $34.6 billion, with Citigroup, Deutsche Bank, HSBC Holdings, and J.P. Morgan Chase financing the entire deal.
  • The loan, guaranteed by the banking group, fully covers the bid price and could be the world's largest corporate loan to date.
  • Banks are lending ever larger amounts, with €236 billion of takeovers announced in the utilities industry last year, almost double the €122 billion in 2004.
  • Utilities are generating large amounts of cash due to record-high natural gas and coal prices, making them attractive targets for acquisition.
  • E.ON's full-year net income jumped 71 percent to €7.4 billion, while its acquisition of Endesa will raise its capital expenditures to €55.2 billion.
  • Banks are reaping fees for merger advice, charges on lending, and underwriting bonds to repay loans, with the full cost of E.ON's acquisition increasing by €25.7 billion when debt and pension provisions are added.
  • Utility bonds have recovered as the industry has concentrated on its central business, with companies like Enron expanding into non-core areas that did not make sense.

Statistics:

  • €236 billion: the value of takeovers announced in the utilities industry last year, almost double the €122 billion in 2004.
  • €29.1 billion: the cash bid for Spain's Endesa by E.ON, or $34.6 billion, with Citigroup, Deutsche Bank, HSBC Holdings, and J.P. Morgan Chase financing the entire deal.
  • €55.2 billion: the full cost of E.ON's acquisition, including debt and pension provisions.
  • €7.4 billion: E.ON's full-year net income, up 71 percent from the previous year.
  • €200 million: the amount Alabama Power plans to raise through bond sales this month.
  • €124 million: the amount Dominion Resources, a Richmond, Virginia-based utility, plans to raise through bond sales next month.

Sources:

  • Bloomberg News
  • Andrew Watt, energy analyst at Standard & Poor's
  • Erhard Schipporeit, chief financial officer of E.ON
  • Ulf Moritzen, manager at Nordinvest
  • Vincenzo Falbo, head of international operations at Eaton Vance
  • Scott Hetzer, treasurer of Dominion Resources
  • Wulf Bernotat, chief executive of E.ON