Telefónica has placed a new €750mn green hybrid bond with a coupon of 7.125% and a call option exercisable between August and November 2028. At the same time, Telefónica has launched an offer to exchange any and all of the €1.5bn still outstanding on the two hybrids with calls in March and September 2023.
Thus, by redeeming all of the outstanding bonds, Telefónica will reduce its outstanding hybrid balance by €750mn and the equity component by €375mn, within the level considered acceptable by S&P. The announcement reinforces our view that corporate issuers of hybrid bonds who are not experiencing financial difficulties will seek to redeem their hybrids at the call date. And, depending on their reliance on the equity component, either replace them with new hybrids (as in the case of Telefónica) or cancel them (as in the case of Naturgy).
In our view, the next key announcement is EDF’s $2.1bn hybrid with a call date of January 2023. The company could argue that it faces some degree of financial stress and that the cost of a replacement hybrid appears prohibitive, which could support an extension on economic grounds. However, we believe that one solution could be to replace the equity component of the hybrid by converting OCEANE convertible bonds into equity as part of the takeover bid by the French state. However, so far there has been no comment on this from either EDF or S&P.