And Draghi got his gun

Red Eléctrica took advantage of the measures put in place by the European Central Bank to defend the Eurozone economy in order to issue 10-year bonds at 1.042%.

  • Observatories
  • Financial

Tomás Gallego, Financial Director of RED ELECTRICA Group, and Rosa Velasco, Head of Finance Department

The objectives of Red Eléctrica’s 2014-2019 Strategic Plan represent a challenge and entail the permanent quest for and achieving of efficiencies. Among them, obtaining an increase in the Group’s profit at a compounded annual growth rate of around 5-6% since 2013.

The regulatory framework for the electricity transmission activity, a result of the reform process within the sector, is transparent and provides regulatory stability to our business, as well as contributing to the system’s sustainability and efficiency. But it is, in turn, a demanding regulatory framework where discipline in cost control is crucial. It implies that all items of the income statement will need to be optimised.

This requirement to maintain a continuous improvement strategy oriented towards efficiency now extends to all Company expenditure including the financial results.

The regulatory framework and its drive for system efficiency are also the cornerstone of our financial strategy.

Today we know the financial remuneration rate set for our transmission assets, 6.5%, and regulation indicates that from 2019 its variation will be gradual and limited. We even know that if it is set in an environment of low interest rates, it could be reduced in stages to 3.5% in 2025. The same mechanism would also work upward should interest rates rise.

Knowing the minimum and maximum financial remuneration, together with this mechanism, gives us options to take advantage of the situation surrounding interest rates. It is true we do not know where our reference - the Spanish 10-year bond – will be in the establishing period and therefore the rate itself. However, these limits to the variation of the financial remuneration rate provide clear references in debt policy decisions and offer up an interesting challenge.

Therefore, the objective of the financial strategy defined in 2015 is twofold in terms of profitability: first, focus our efforts on reducing the impact of interest rates on our results until 2019, optimising profitability for our current shareholders and second, preserve future efficiency in upcoming regulatory periods beyond 2020, taking advantage of the possibilities that the financial market and the new regulatory framework offer to optimise the difference between the future remuneration of investments and the cost of our debt.

With this focus, 2016 started with a very unstable economic environment for any long-term financial strategy. From the Paris Protocol and the global commitment to renewable energy we moved immediately to an environment with signs of crisis: the European Central Bank lowered interest rates to encourage investment and exports; the United States Federal Reserve scaled back its forecasts on how interest rates will increase; the price of oil did not rise; political uncertainty remains in Spain, and the UK is considering its possible departure from the European Union.

In this context, the need to address a €320 million bond issue that matures in October 2016 carrying an annual interest cost of €11.2 million posed a challenge for Red Eléctrica in this fiscal year.

The first quarter of 2016 was very volatile and a complex outlook demanded a permanent monitoring of the market: the perfect situation to choose the time and the optimum term of the bond issue.

On 10 March, Mario Draghi, President of the European Central Bank, took up arms to defend the Eurozone economy from the global economic slowdown and announced a corporate asset purchase programme. In this context, Red Eléctrica took advantage of the rapid cost reduction that took place to launch a 10-year bond issue at 1.042%, the lowest cost with this maturity reached by a Spanish issuer.

This transaction allows a new step to be taken to support the achievement of the objective of increase in profits set out in our 2014-2019 Strategic Plan. Mutually, the progressive achievement of this plan will strengthen our risk profile and our solid credit standing.

Lastly, the 2.7 billion-euro demand we have received for this issue, requires that we finish this article expressing our thanks to all financial market agents for their confidence in this plan in the Red Eléctrica Group. To all, thank you very much.