Counterparty risk concerns drive Enel to bond market

Funding capital projects and acquisitions for Enel, Italy’s largest electricity generator and distributor, has been a challenge since the start of the financial crisis. Concerns about the strength of Europe’s banks haven’t made life any easier for the company’s head of group finance, Alessandro Canta.

European supervisors tried to restore faith in the continent’s banks in July this year by publishing the results of a European Union-wide stress-test exercise. However, Enel has not changed its approach on the basis of the results, says Canta: “In general, we do not take the stress-test results into account in dealing with banks.”

All Italy’s major banks passed the stress test, but Canta is still taking measures to insulate Enel from the risk of a bank failure. The first stage, he says, is to cut down on the proportion of funding obtained from banks. “In common with other corporates, Enel is basing its strategy on progressively replacing bank loans with bond issuances,” he says.

Over the six months to June 30, the amount of long-term loans outstanding fell from €21.6 billion to €17.7 billion, while long-term bonds increased from €31.9 billion to €35.9 billion. A similar, although less pronounced, trend emerged in short-term debt as well.

The company launched a multi-currency bond issue in September 2009, raising €10 billion, and followed this in February 2010 with a €3 billion retail bond issue. And although it established an €8 billion credit line with a syndicate of banks to finance its purchase of Madrid-based utility company Endesa in 2009, it subsequently announced it would increase its bond issuance programme to cover the cost of the acquisition.

But the 2009 multi-currency bond wasn’t entirely independent of the banks: it involved derivatives to hedge the currency and interest rate risks arising from the issuance. To mitigate counterparty risk and reduce costs, Enel decided to use credit support annex (CSA) agreements for the first time.

“Following the collapse of Lehman Brothers, we have wondered a lot about the creditworthiness of our bank counterparties,” Canta explains. “Our main goal was to defend our credit from a default. The benefit of a CSA is that it allows us to deal with derivatives without a credit charge, so we can minimise costs.”

A year on, Canta is convinced of the wisdom of using CSAs. “We now have 10 CSAs in place, and we have two more counterparties that are going to join them. According to our CSA agreements, all new interest rate derivatives deals with current CSA counterparties will be covered by subsequent collateral calls,” he says.

Counterparty politics

Heightened vigilance towards bank counterparties is another tactic Canta favours. Enel’s group-level risk management office, set up in 2009, includes a permanent counterparty risk unit, concentrating on the firm’s interactions with banks. “We principally look at credit default swap spreads, at credit ratings, at the credit standing of the banks and our relationship with them in general,” Canta explains.

But although Italian banks have significant sovereign risk exposure through their holdings of Italian government bonds, Canta says the Eurozone sovereign debt crisis earlier this year “did not change our mind on Italian or Spanish banks; they are still our principal banks for funding, so there is no change in perception”.

And Enel is far from cutting its ties to the sector: in April it replaced an existing €5 billion working capital credit line with one twice the size, although it has not drawn on it so far (and emphasises that this is separate from its debt refinancing programme).