Investment Research
Trade Idea
- Buy Caruna 1.5% 2023 outright
Senior Analyst
Jakob Magnussen, CFA
[email protected]
+45 45 12 85 03
3 October 2016
This document is intended for institutional investors and is not subject to all the independence and disclosure standards applicable to debt research reports prepared for
retail investors.
www.danskebank.com/CI
Important disclosures and certifications are contained from page 5 of this document
Buy NOKIA 2019 USD, trading at wide margin to Nokia 2019 EUR
Published on 23 May 2016
Buy Caruna 1.5% 2023 outright
Still undervalued
Key arguments for the trade
•
The Caruna 1.5% 2023 is fundamentally undervalued. Being ‘BBB+’
rated, Caruna trades between the ‘BBB-’ and the ‘BBB’ curve.
•
We believe the Caruna 1.5% 2023s trade at wide levels due to a lack
of name recognition. Caruna is a relatively new issuer and we believe
many investors have yet to get properly acquainted with this name.
•
Caruna’s business risk profile is excellent. This is because 100% of its
earnings originate from Finnish power distribution activities. Income
from these assets is fully regulated by the Finnish authorities. This
provides a very high degree of earnings and cash flow visibility in the
short to medium term
•
Despite being a fairly new company, Caruna’s operating activities have
a very long track record, as the company is based on Fortum’s Finnish
distribution activities.
•
Caruna is the result of a leveraged acquisition, with infrastructure
and pension funds acquiring Fortum’s Finnish grid in a leveraged
transaction. This has made the ownership structure and corporate
structure relatively complex. We consider inter-creditor agreements
and covenant protections adequate to offset the complexity risks.
•
We struggle to justify the recent underperformance of Caruna relative
to its Finnish peer Elenia.
•
See Initiation of coverage - Caruna, 24 August.
The regulator has recently adjusted the model to the benefit of Caruna.
•
Chart 1. Relative value, indicative mid spreads
Mid Spread (EUR)*
90
Chart 2. Credit spread development
ASW Issue
Currency
100
Utilities BBBELENIA 2.875% '20 (NR/BBB S)
80
90
HNANO FRN '20 (NR/NR)
70
CARUNA 1.5% '23 (NR /BBB+ S)
80
70
60
50
Utilities BBB
DONGAS 2.625% '22 (Baa1 NO/BBB+ S)
Utilities BBB+
Utilities ADONGAS 4.875% '21 VATFAL 5.375% '24
(A3 NO/ BBB+ NO)
FINPOW 3.5% '24 (A1 PO/A+ PO)
VATFAL 6.25% '21
40
30
60
50
40
30
STATNE 4.05% '29
STATNE 4.85% '27 (A2 S/A+ S)
20
DONGAS 6.5% '19
VATFAL 6.75% '19
VATFAL 5% '18
10
10
HNANO 6.11% '18
0
1
2
3
4
20
5
6
7
8
9
* Z-spreads. Discount margin for floaters. Swapped to indicated currency. ** Years-to-worst
Note: Fair value curve(s) based on Danske Bank Markets' (mid) peer group of European issuers
Source: Bloomberg, Danske Bank Markets
10
11
12
13
YTW**
0
Jul-2016
Aug-2016
CARUNA EUR 1.5% 2023
Aug-2016
Sep-2016
ELENIA 42646 2.875% 2020
Source: Bloomberg, Danske Bank Markets
Sep-2016
Oct-2016
IBOXX EURO Utilities
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Buy Caruna 1.5% 2023 outright
Earnings predictability outweighs structure’s complexity
•
Market leader in Finnish DSO market. Caruna delivers the highest
quantity of electricity of the country’s distribution operators.
Furthermore, it has a strong record of efficiency. This is important in
terms of being allowed additional revenues.
•
Stable rating. S&P assigns a stable outlook to Caruna’s ‘BBB+’ rating
expecting a continued excellent business risk profile and better
metrics going forward. FFO to NIBD was only 3% after 2015. We
expect this to improve to at least 9% at year-end 2016.
•
High earnings visibility with limited scope for tariff deficits. The
Finnish regulatory model is rather predictable and relatively more
benign towards network companies than the European average.
•
Strong cost coverage. The Finnish model allows for most costs to be
covered via tariff increases next year. Even weather-related costs can
to some extent be recouped.
•
•
Experienced owners. Borealis and First State have experience running
regulated assets across Europe.
Relatively strong financial policy: S&P assigns a one-notch higher
rating to Caruna than to Elenia due mainly to a more comforting
financial policy.
Key risks to the trade
•
Only partial recovery of storm costs.
•
Should Caruna start to underperform peers materially, it would hurt
revenues.
•
Potential long-term trend of local power production.
•
Long-term reliance on politicians providing a stable regulatory
framework.
Finnish DSO market shares
Source: Company data, Danske Bank Markets
Caruna’s ownership structure
Borealis (40%)
Keva (12.5%)
First State (40%)
ELO (7.5%)
Various holdco’s
Caruna Networks B.V.
Suomi Power B.V.
Caruna Networks Oy
Caruna Networks
Sähkönsiirto Oy
Caruna Networks
Espoo Oy
Caruna Oy
Caruna Espoo Oy
DAC
transmission
Finance
(ISSUER)
Source: Company information, Danske Bank Markets
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Buy Caruna 1.5% 2023 outright
Bond data
BUY – Caruna 1.5% 2023
Recommendation (general on Caruna)
ISIN
Overweight
XS1418835002
Currency
EUR
Issue size (EURm)
500
Credit ratings (bond):
Type of instrument:
Coupon:
Maturity:
Issuing entity
ECB CSPP eligible
Cash price:
YTM:
ASW spread:
NR/’BBB+’ S
Senior Secured
1.5%
24 June 2023
DAC Transmission Finance
(Ireland)
No
105.4 (indicative ask)
0.7%
+69bp
Source: Bloomberg, Danske Bank Markets
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Fixed Income Credit Research Team
Thomas Hovard
Head of Credit Research
+45 45 12 85 05
[email protected]
Henrik René Andresen
Credit Portfolios
+45 45 13 33 27
[email protected]
Gabriel Bergin
Strategy, Industrials
+46 8 568 80602
[email protected]
Brian Børsting
Industrials
+45 45 12 85 19
[email protected]
Bendik Engebretsen
Industrials
+47 85 40 69 14
[email protected]
Lars Holm
Financials
+45 45 12 80 41
[email protected]
Katrine Jensen
Financials
+45 45 12 80 56
[email protected]
Louis Landeman
Industrials, Real Estate
+46 8 568 80524
[email protected]
Jakob Magnussen
Utilities, Energy
+45 45 12 85 03
[email protected]
Jonas Meyer
Shipping
+47 85 40 70 79
[email protected]
August Moberg
Industrials & Construction
+46 8 568 80593
[email protected]
Niklas Ripa
Credit Portfolios
+45 45 12 80 47
[email protected]
Mads Rosendal
Industrials, TMT
+45 45 14 88 79
[email protected]
Sondre Dale Stormyr
Offshore rigs
+47 85 40 70 70
[email protected]
Haseeb Syed
Industrials
+47 85 40 54 19
[email protected]
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Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ('Danske Bank'). The author of this research report
Jakob Magnussen, Senior Analyst.
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the
research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further
certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations
expressed in the research report.
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Danske Bank is not registered as a Credit Rating Agency pursuant to the CRA Regulation (Regulation (EC) no. 1060/2009); hence, Danske Bank does
not comply with or seek to comply with the requirements applicable to credit rating agencies.
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Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not
receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.
Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Caruna and may hold long or short positions in, or
otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and
undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are
covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked.
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As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is
possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Caruna in the next
three months.
Danske Bank has made no agreement with Caruna to write this research report. No parts of this research report have been disclosed to Caruna. No
recommendations or opinions have been disclosed to Caruna and no amendments have accordingly been made to the same before dissemination of the
research report.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics
for each individual security, issuer and/or country. Documentation can be obtained from the authors on request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated
throughout the text.
Expected updates
None.
See the front page of this research report for the date of first publication.
Recommendation structure
Investment recommendations are based on the expected development in the credit profile as well as relative value compared with the sector and peers.
As at 30 June 2016 Danske Bank Markets had investment recommendations on 55 corporate bond issuers. The distribution of recommendations is
represented in the distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories
above to which Danske Bank provided investment banking services in the previous 12 months ending 30 June 2016 is shown below.
Rating
Overweight
Marketweight
Underweight
Anticipated performance
Outperformance relative to peer group
Performance in line with peer group
Underperformance relative to peer group
Time horizon
3 months
3 months
3 months
Distribution of recommendations
34%
50%
16%
Investment banking relationships
27%
32%
33%
Changes in recommendation within past 12 months
Date
22 August 2016
New recommendation
Overweight
Old recommendation
N.a.
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