TenneT optionality on the rise

Nov 14, 2024

To read a full report, please download PDF from the link above

TenneT bonds offer the potential for large returns

TenneT Holding BV unsecured bond rating: BUY

We support a strong preference for the ‘new vintage’ TenneT bonds (i.e. those issued from 2020 onwards) which are trading below par.

• TenneT has commenced a process to sell down its stake in TenneT Germany.

• New ‘vintage’ TenneT bonds offer the potential for sizeable returns to be realised in a scenario where a majority of TenneT Germany is sold following the transfer of bonds to the TenneT Germany perimeter.

• The low cash price TenneT bonds offer the greatest potential upside in the above scenario. A retracement of previous gains achieved up to last November for the TENN 0,5 2040 issue would imply 26pts of upside to 94pt, implying a capital return of 38%. A blue sky scenario would see this issue taken out at par and imply an even greater capital return of 48%. A total of four ‘new vintage’ bonds currently trade at very low cash prices below 80pts.

• All TenneT bonds trading below par offer investors the opportunity to outperform the market over the next six months via a variety of different risk-reward trade offs.

• Downside risks for ‘old’ vintage TenneT bonds appear limited given current valuations which are trading close or in line with same rated utility peer ESB, the requirement for TenneT to retain a minimum of an A- rating and given the scope for ratings upgrades in the event of a sale of the German business.

• All TenneT bonds additionally offer the potential to benefit from an EoD clause, which we suggest management may want to address through a consent solicitation ahead of a sale of the German business

In the attached presentation, we discuss in detail the relative value, fundamental and covenant-related considerations which inform our positive BUY recommendation

Disclaimer

CERTIFICATION

The author(s) mentioned on the cover of this report hereby certify(ies) (or, where multiple authors are responsible, individually certify with respect to each security that the author covers in this report) that the views expressed in this report accurately reflect their personal views about the subject company(ies) and its (their) securities, and also certify(ies) that they have not been, are not, and will not be receiving direct or indirect compensation in exchange for expressing any specific recommendation(s) or view(s) in this report.

DISCLAIMERS

This document is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote independent investment research. Therefore, MUFG is not subject to any prohibition on dealing ahead of the dissemination of the investment recommendation

Date and time of completion of the recommendation: 2.40pm on 14^th November 2024

Document issued by: Darren Hook, Credit Strategist

Content of the document TenneT: TenneT optionality on the rise

General disclaimer

MUFG Bank, Ltd. (“MUFG Bank”) is a limited liability stock company incorporated in Japan and registered in the Tokyo Legal Affairs Bureau (company no. 0100-01-008846). MUFG Bank’s head office is at 7-1 Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-8388, Japan. MUFG Bank’s London branch is registered as a UK establishment in the UK register of companies (registered no. BR002013). MUFG Bank is authorised and regulated by the Japanese Financial Services Agency. MUFG Bank’s London branch is authorised by the Prudential Regulation Authority (FCA/PRA no. 139189) and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of MUFG Bank London branch’s regulation by the Prudential Regulation Authority are available from us on request.

MUFG SECURITIES EMEA PLC (“MUS(EMEA)”) which is authorised in the United Kingdom by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”) and the PRA (Registration Number 124512).

[in case of valuation of a financial instrument/issuer or price target: Include a Summary of any bASIS OF VALUATION OR METHODOLOGY AND THE UNDERLYING ASSUMPTIONS AND A SUMMARY OF ANY CHANGES IN THE VALUATION, METHDODOLOGY OR UNDERLYING ASSUMPTIONS]

[in case of use of a non-proprietary model: an indication of the place where detailed information about the valuation or methodology and the underlying assumptions is directly and easily accessible]

[in case of use of a proprietary model: an indication of the place where material information about the proprietary models used is directly and easily accessible]

MUFG do not plan to update this recommendation. The price of financial instruments mentioned in the recommendation were prices known by MUFG when the recommendation was prepared.

[Where the recommendation differs from any of MUSE’s previous recommendations concerning the same financial instrument or issuer that has been disseminated during the preceding 12-month period, the change(s) and the date of that previous recommendation are indicated]

More information about our investment recommendations are available here:

https://www.mufgresearch.com/disclosures/

MUFG Bank and MUSE prepare and disseminate a range of commentary to their clients (“General Sales and Trading Communications”) prepared by sales, trading, capital markets or other non-Research functions, including but not limited to runs, axes, pricing indications, short term views and macro commentary which are for information purposes only and should not be construed as an investment recommendation to buy or sell any financial instrument or to participate in any trading strategy. These are not intended for dissemination to the public. In addition, sales and trading personnel also produce and disseminate strategy pieces, sales notes, trading and market commentary (“Sales and Trading Commentaries”) which may be defined as investment recommendations under the Market Abuse Regulation. Investment Recommendations are marketing communications. General Sales and Trading Communications and Sales and Trading Commentaries do not contain a personal recommendation and do not take into account the individual financial circumstances, needs or objectives of the recipients. Recipients should therefore seek their own financial, legal, tax or other advice before deciding to invest in any of the instruments mentioned in such documents.

This material and the contents therein are not intended for recipients outside of the United Kingdom (“UK”) or the European Economic Area (“EU”).

Certain information contained in our General Sales and Trading Communications and Sales and Trading Commentaries has been obtained or derived from third party sources and while such information is believed to be correct and reliable it has not been independently verified. MUFG Bank and MUSE do not make any guarantee, representation, warranty or undertaking, express or implied, as to the fairness, accuracy, reliability, completeness, adequacy or appropriateness of any information or comments contained in these documents. Furthermore the information may not be current due to, among other things, changes in the financial markets or economic environment. MUFG Bank and MUSE do not, and have no obligation to update any such information contained in is Sales and Trading Commentaries. Any prices or quotations contained herein are indicative only, do not represent firm quotes as to either price or size and should not be used for valuation purposes.

General Sales and Trading Communications and Sales and Trading Commentaries are not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. Sales and Trading Commentaries are produced by non-Research functions, including sales and trading do not constitute investment research and are not prepared under conditions designed to promote the independence of investment research. It is not subject to any prohibition on dealing ahead of the dissemination of investment research. MUFG Bank and MUSE may make markets, provide liquidity, have (or may in the future enter into) principal or proprietary positions (long or short) in and effect transactions in the financial instruments or trading strategies mentioned or described in our General Sales and Trading Communications and Sales and Trading Commentaries and may also perform or seek to perform investment banking, brokerage, or other services for those companies including entering into transactions with them. In general, our Sales and Trading Commentaries are short term views in response to market movements and news.

The sales and trading staff who produce investment recommendations have received compensation based upon various factors, including individual performance competitive factors, firm revenues, sales and trading revenues and overall investment banking revenues.

Our General Sales and Trading Communications and Sales and Trading Commentaries are proprietary to MUFG Bank and MUSE and may not be quoted, circulated or otherwise referred to without our prior written consent. Notwithstanding this, MUFG Bank and MUSE shall not be liable in any manner whatsoever for any consequences or loss (including but not limited to any direct, indirect or consequential loss, loss of profits and damages) arising from any reliance on or usage of this report and accepts no legal responsibility to any investor who directly or indirectly receives this material.

This material has been prepared in accordance with MUFG Bank’s and MUSE’s organisational and administrative arrangements for managing conflicts of interest. Such arrangements include policies which set out guidelines relating to (but not limited to) restrictions on access to information, personal dealing and inducements.

Any instruments referred to in this material may not be eligible for sale in all jurisdictions or to all categories of investors. This material is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or is located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation or rule. Certain products which may be mentioned in this material, including derivative products, give rise to substantial risk, including currency and volatility risk, and are not suitable for all investors.

This material, is only intended for distribution to a “professional client” or “eligible counterparty” (as defined in UK FCA and PRA rules) and should not be passed onto any other person.

This material and all claims arising in connection with it are governed by, and to be construed in accordance with, English law.

General disclaimer for the website (to be included on the page where Investment Recommendations will be made available to clients)

MUBK and MUSE(EMEA)

prepare and disseminate a range of commentary to their clients (“General Sales and Trading Communications”) prepared by sales, trading, capital markets or other non-Research functions, including but not limited to runs, axes, pricing indications, short term views and macro commentary which are for information purposes only and should not be construed as an investment recommendation to buy or sell any financial instrument or to participate in any trading strategy. These are not intended for dissemination to the public. In addition, sales and trading personnel also produce and disseminate strategy pieces, sales notes, trading and market commentary (“Sales and Trading Commentaries”) which may be defined as investment recommendations under the Market Abuse Regulation. Investment Recommendations are marketing communications. General Sales and Trading Communications and Sales and Trading Commentaries do not contain a personal recommendation and do not take into account the individual financial circumstances, needs or objectives of the recipients. Recipients should therefore seek their own financial, legal, tax or other advice before deciding to invest in any of the instruments mentioned in such documents.

Certain information contained in our General Sales and Trading Communications and Sales and Trading Commentaries has been obtained or derived from third party sources and while such information is believed to be correct and reliable it has not been independently verified. MUBK and MUS(EMEA) do not make any guarantee, representation, warranty or undertaking, express or implied, as to the fairness, accuracy, reliability, completeness, adequacy or appropriateness of any information or comments contained in these documents. Furthermore, the information may not be current due to, among other things, changes in the financial markets or economic environment. MUBK and MUS(EMEA) do not, and have no obligation to update any such information contained in is Sales and Trading Commentaries. Any prices or quotations contained herein are indicative only, do not represent firm quotes as to either price or size and should not be used for valuation purposes.

General Sales and Trading Communications and Sales and Trading Commentaries are not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. Sales and Trading Commentaries are produced by non-Research functions, including sales and trading do not constitute investment research and are not prepared under conditions designed to promote the independence of investment research. It is not subject to any prohibition on dealing ahead of the dissemination of investment research. MUBK and MUS(EMEA) may make markets, provide liquidity, have (or may in the future enter into) principal or proprietary positions (long or short) in and effect transactions in the financial instruments or trading strategies mentioned or described in our General Sales and Trading Communications and Sales and Trading Commentaries and may also perform or seek to perform investment banking, brokerage, or other services for those companies including entering into transactions with them. In general, our Sales and Trading Commentaries are short term views in response to market movements and news.

Our General Sales and Trading Communications and Sales and Trading Commentaries are proprietary to MUBK and MUS(EMEA) and may not be quoted, circulated or otherwise referred to without our prior written consent. Notwithstanding this, MUBK and MUS(EMEA)shall not be liable in any manner whatsoever for any consequences or loss (including but not limited to any direct, indirect or consequential loss, loss of profits and damages) arising from any reliance on or usage of this report and accepts no legal responsibility to any investor who directly or indirectly receives this material.

This material has been prepared in accordance with MUBK’s and MUS(EMEA)’s organisational and administrative arrangements for managing conflicts of interest. Such arrangements include policies which set out guidelines relating to (but not limited to) restrictions on access to information, personal dealing and inducements.

This material, is only intended for distribution to a “professional client” or “eligible counterparty” (as defined in UK FCA and PRA rules) or their equivalent(s) within the EU and should not be passed onto any other person.

This material and all claims arising in connection with it are governed by, and to be construed in accordance with, English law.

DISCLOSURES FOR THE WEBSITE CONCERNING INVESTMENT RECOMMENDATIONS:

MUSE AND MUFG BANK MAY OWN A NET LONG OR SHORT POSITION EXCEEDING THE THRESHOLD OF 0,5 % OF THE TOTAL ISSUED SHARE CAPITAL OF THE ISSUER.

ENTITIES MENTIONED IN OUR SALES AND TRADING COMMENTARIES MAY HAVE INTEREST IN EXCESS OF 5% OF THE TOTAL ISSUED SHARE CAPITAL OF MITSUBISHI UFJ FINANCIAL GROUP. INFORMATION RELATING TO MAJOR SHAREHOLDERS IS AVAILABLE ON MUFG; STOCK INFORMATION | MITSUBISHI UFJ FINANCIAL GROUP

MUSE AND MUFG BANK MAY BE MARKET MAKER OR LIQUIDITY PROVIDER IN THE FINANCIAL INSTRUMENTS OF THE ISSUER AND MAY HAVE BEEN LEAD MANAGER OR CO-LEAD MANAGER OVER THE PREVIOUS 12 MONTHS OF ANY PUBLICLY DISCLOSED OFFER OF FINANCIAL INSTRUMENTS OF THE ISSUER.

MUSE AND MUFG BANK ARE NOT PARTY TO AN AGREEMENT WITH THE ISSUER RELATING TO THE PRODUCTION OF THE RECOMMENDATION, NEITHER DISCLOSE THEIR RECOMMENDATIONS TO ISSUERS, SO THEY CAN’T CAN MAKE NO AMENDMENT TO THE INVESTMENT RECOMMENDATION.

A DESCRIPTION OF THE EFFECTIVE INTERNAL ORGANISATIONAL AND ADMINISTRATIVE ARRANGEMENTS AND OF ANY INFORMATION BARRIER IT HAS SET UP FOR THE PREVENTION AND AVOIDANCE OF CONFLICTS OF INTEREST WITH RESPECT TO THE RECOMMENDATIONS IS AVAILABLE ON MUFG; POLICY FOR CONFLICTS OF INTEREST MANAGEMENT | MITSUBISHI UFJ FINANCIAL GROUP

MUSE AND MUFG BANK ARE PART OF THE MUFG GROUP HOWEVER OWING TO THE ORGANISATION OF THE GROUP, EMPLOYEES INVOLVED IN THE PRODUCTION OF SALES AND TRADING COMMENTARIES DO NOT KNOW AND ARE NOT EXPECTED TO KNOW WHAT IS DONE BY OTHER ENTITIES OF THE GROUP.

OUR CREDIT STRATEGY RECOMMENDATIONS INCORPORATE VALUATIONS (RELATIVE VALUE) AND THE AUTHOR’S FUNDAMENTAL VIEW ON THE SECURITY. THE FUNDAMENTAL CREDIT VIEW OF AN ISSUER MAY BE BASED ON THE COMPANY'S UNDERLYING CREDIT TRENDS, OVERALL CREDITWORTHINESS AND OUR OPINION ON WHETHER THE ISSUER WILL BE ABLE TO SERVICE ITS DEBT OBLIGATIONS WHEN THEY BECOME DUE AND PAYABLE. WE MAY REVIEW, AMONG OTHER THINGS, THE COMPANY'S CASH FLOW CAPACITY AND TRENDS AND STANDARD CREDIT RATIOS, SUCH AS GROSS AND NET LEVERAGE, INTEREST COVERAGE AND LIQUIDITY RATIOS. WE MAY ALSO REVIEW PROFITABILITY, CAPITALIZATION AND ASSET QUALITY, AMONG OTHER VARIABLES, WHEN ASSESSING FINANCIALS. WE ALSO TAKE INTO ACCOUNT MANAGEMENT STRATEGY, FINANCIAL POLICY AND THE OVERALL COMPETITIVE LANDSCAPE IN RELEVANT INDUSTRIES INSOFAR AS THESE MAY IMPACT CREDIT QUALITY. WE MAY ALSO ASSESS MARKET TECHNICAL ASPECTS SUCH AS THE LIKELY FUTURE SUPPLY OF BONDS OR FUND FLOWS INTO THE BROADER ASSET CLASS. UNLESS WE SPECIFY A DIFFERENT RECOMMENDATION FOR THE COMPANY’S INDIVIDUAL SECURITIES, AN ISSUER RECOMMENDATION APPLIES TO ALL OF THE BONDS AT THE SAME LEVEL OF THE ISSUER’S CAPITAL STRUCTURE. THE INVESTMENT RECOMMENDATIONS REMAIN VALID ONLY AT THE POINT OF PUBLICATION, AS THEY ARE NOT UPDATED TO TAKE ACCOUNT OF CHANGES IN THE FINANCIAL MARKETS OR NEW NEWS ABOUT THE ISSUER OR INSTRUMENTS.

DEFINITIONS

POSITIVE:

CREDIT: WE EXPECT THE CREDIT SPREAD TO TIGHTEN, ON AN INTEREST RATE HEDGED BASIS

NEUTRAL:

CREDIT: WE EXPECT THE CREDIT SPREAD TO REMAIN STABLE, ON AN INTEREST RATE HEDGED BASis