Eni’s chief financial officer Francesco Gattei spoke to GlobalCapital this week about the company’s highly successful €2bn retail bond issue in January, and how it fits into the plans of an oil and gas company financing itself at a time when the industry faces an unprecedented change of direction, towards clean energy.
The issuer launched the first corporate bond in the Italian retail market since 2015 on January 16. It was also the company's first retail deal since 2011. To make it still more unusual, the bond is sustainability-linked — one of the first times an SLB has been sold to retail investors.
The five year bond rated Baa1/A-/A- was marketed with a TV and press advertising campaign at a fixed yield of 4.3% and placed by 24 banks led by Imi-Intesa Sanpaolo and UniCredit. It was a phenomenal hit with investors.
Launched at €1bn with a potential increase to €2bn, the bond attracted €2bn of orders on the first day and the three week sale was closed on January 20 after five days, with €10bn of demand.
Each of the nearly 310,000 subscribers got the minimum €2,000 allocation — then the rest of the €2bn bond was allocated pro rata to orders.
For years, the Italian retail market — like those in other countries — had slumbered, since interest rates were too low to attract investors. Only issues by the government in recent years have kept investors’ habit of buying bonds alive. But the steep rate rises of the past year have brought bonds back in range of private investors.
Having in June 2021 become the first oil major to issue an SLB, with a €1bn seven year institutional issue, Eni used the structure again for its retail offering.
Investors will receive a 50bp premium payment at maturity in February 2028 if, by the end of 2025, Eni has failed to reach either of two targets.
First, it aims to reduce its Scopes 1 and 2 emissions from its upstream business by 65% from a 2018 baseline to 5.2m tonnes of CO2 equivalent. This means the operational emissions from producing oil and gas, not the much greater quantities of carbon released when customers burn Eni’s products. Eni estimates its total emissions including Scope 3 were 505m tonnes in 2018.
Second, Eni will increase its renewable energy installed generating capacity to at least 5GW.
Market participants have said they thought the bond issue was expensive for Eni. On the day the bond was launched, the five year euro swap rate was 2.78%, implying a spread of 152bp over mid-swaps.
Engie, the French electricity and gas company rated nearly the same as Eni at Baa1/BBB+/A-, issued a €1bn seven year bond at the beginning of January, as part of a €2.75bn three tranche deal, which was priced at 85bp over mid-swaps.
Shortly before Eni’s deal, EnBW, the German power company rated Baa1/A-, issued a €500m 5.5 year bond at 90bp over.
Observers have said they believe Eni decided to pay more for the investor diversification and marketing benefits of the retail deal.
Gattei told GlobalCapital why Eni decided to bring the transaction, why it chose the sustainability targets and what the market thought of them.
He also gave his reaction to the European Central Bank’s recent move to step up its policy on greening its corporate bond holdings and to the growing trend for investors and banks to set targets for oil and gas companies to reduce emissions and to back away from financing companies to explore for new oil.
Eni aims to reduce its total greenhouse gas emissions, including Scope 3, to net zero by 2050. It is investing in a range of new technologies, devoting about 30% of its capex to transition investments in 2022-25.
At the same time, it is proud of the fact that it has been discovering oil and gas at a faster rate than its peers, and more efficiently and profitably. It is expanding production and opening new wells at many sites, including in Norway, Italy, Mexico, Algeria, Libya, Egypt, Angola and Mozambique.
GlobalCapital: Why did you decide to issue a retail bond?
Francesco Gattei, Eni: There is clearly a lot of liquidity available, particularly after Covid, as Italians are generally among the top savers. This liquidity is generally sleeping in cash or in bank accounts. The new yield curve for bonds will make this kind of issue more attractive [to them]. So why don’t we try to capture this potential and present an instrument with high credibility that could be comparable with treasury bonds?
This is an opportunity to touch another layer of financing, giving us an element of diversification and reinforcing our communication in terms of sustainable financing, sustainable transition and therefore also the brand.
The communication value of this issue is high. It’s an opportunity to present Eni with this commitment to transition — to present this concept where transition is not a matter of exclusion. Transition means changing and ensuring energy security. It’s not that you will have the new world [of renewable energy] without the old world. Both worlds have to be there to have a real sustainable transition.
That is the concept and the answer was well above our expectations. We thought it would be a successful issue but demand was incredible.
Launching this transaction was going to involve some risk: the first retail bond for seven years. Why did you also decide to make it sustainability-linked?
Our financing strategy should be strictly linked to our industrial strategy. When I ask for money from financiers we want them to be well aware that we are committed to the transformation of the company to different targets for sustainability and reduction of emissions.
So we have not excluded this retail bond from this general concept. We thought there was value in not just limiting our sophisticated conversation to large investors. I like this element also for retail.
We were the first company in our sector in 2021 that published a Sustainability-Linked Financing Framework. So far we have issued €13bn of financial instruments that have sustainability targets. This is the largest amount in our sector, so there is no other company with such a magnitude of emissions that has [committed to its targets to such an extent].
We continue to do that because we believe it is [important] not to just declare a target but to commit to it. This could have a negative feedback if we fail but we think the company has to reach that result.
Do you think the sustainability linkage increased investors’ demand for the bond?
I don’t think it specifically increased demand. The real value for us is that the transformation of the company in terms of our targets, our transformation to different streams of energy, is now clear also for retail. So I would highlight more the communcation value with all the people that have asked to subscribe. This is where there is real interest from our point of view to reach our clients.
Participants in the institutional bond market have told us they think Eni had to pay more to borrow in this way than it would have for an institutional bond. First there are the costs such as advertising and fees for the distributing banks, but then also they think you paid a higher spread. Do you agree, and why did you think it was worth paying more to do a retail bond?
The way we worked was to look at our EMTN yield. We had to consider that this was an issue with a potential size of up to €2bn. We aligned the yield with the interest we would have paid for a new single tranche EMTN of that size, so we didn’t overpay.
Spreads moved down during the period between when we announced and launched the bond, but this is something you cannot anticipate. If you go back to the date say 10 days before the closing of the offer, you see that this is the right yield for that kind of size and maturity. For a single [institutional] tranche of €2bn, that was the price we would have paid.
When we talk to banks and issuers from the oil and gas sector, there is clearly an awareness that, with the rise in investors’ focus on ESG, companies from high emitting sectors could have to pay more to issue debt, and need to think ahead about how they are going to finance themselves. Were you partly thinking that in this context, it would be useful to establish the ability to issue retail debt, in case the institutional market becomes more difficult?
We are not seeing any penalty in terms of access to the market or additional cost. Once you have a transition plan and a sustainability framework, the market is ready to finance companies that are transforming themselves, that are committed to the 1.5°C Paris Agreement target.
I cannot speak about other entities, but from our point of view, we don’t see any limitations. At the time we issued bonds, we have seen an amount of demand that is large, and yields that are completely comparable with entities of similar credit ratings. It’s more a matter of having a credible plan, disclosure of your trajectory and transformation strategy, and the market is open.
So the idea was not to ensure a line of credit through the retail market as an alternative for shrinking financing in the [institutional] market, but to add communication value and have a success around the name of Eni that brings the attention of retail investors to a company that is committed, but sometimes perceived as having an old model, whereas actually we have a much more evolving model. So it is another element [showing] that the market for an energy company is open to all potential layers of credit.
Could this exercise help improve retail investors’ perception of Eni as an equity investment?
Clearly now we have €8bn of demand that was not satsified. Equity has a completely different risk profile, but one of the elements that should be considered by these potential investors is that they can clearly gain a higher return by investing directly in our stock. So we hope that this communication and interest generated in a week could also [flow] probably into our stock.
Recently a member of the executive board at the European Central Bank, Isabel Schnabel, gave a speech in which she said the ECB would change its policy on greening its corporate bond portfolio. Rather than just preferring the bonds of greener companies when it buys new bonds, it would go through its €300bn portfolio and sell the bonds of less green companies and replace them with bonds from greener companies. What do you think about that idea?
What we are doing is issuing bonds that are connected to an emissions target, to a trend of reduction. So I don’t know if this will match the ECB’s concept [of greener bonds], but we are substantially moving in the same direction. We’ll see how it works, but for us it’s not a concern because we are working already on these things.
Your SLB contained targets linked to your Scopes 1 and 2 emissions and to installing renewable energy generating capacity, but not for your much larger Scope 3 emissions. But a lot of investors and banks are now focusing on Scope 3 — for example, UniCredit yesterday published a new policy on reducing its financed emissions in the oil and gas sector, which calls for a 29% reduction in Scope 3 emissions by 2030. How are you going to deal with requests like that?
In our Sustainability-Linked Financing Framework we have also targets for Scope 3 on an absolute and intensity basis. We have Scope 3 targets for 2030, 2035, 2040, 2050, so they are well detailed.
When we decide the KPIs that are relevant for a bond, we look at the maturity. For each issue we’ll select two main KPIs subject to maturity.
Clearly an issue in the range of five years requires a target identified in the short term, so we did not choose a target that was less relevant for a short term issue.
Our [Scopes 1, 2 and 3] emissions reduction target by 2030 is 35% from the 2018 level.
Another aspect that financial institutions now highlight is that they do not want to finance expansion of oil and gas production and exploration of new fields. UniCredit mentions this too in its new Oil and Gas Policy. But you emphasise strategically the importance of exploration and that this is a particular strength for Eni as a company. How will that be compatible with your need to secure financing?
Exploration and expansion are two things, then there is reduction of emissions. Our plan is related to doing a lot of things that bring results. We have a plan that includes exploration, but we will continue to reduce emissions, but by mixing our portfolio.
There is an element of [new] projects that is absolutely mandatory in a period when energy security is an issue. We need to reduce emissions by 2030, but stopping investing in certain projects that are still needed is a declaration that is unfeasible.
We believe the trajectory [of emissions] is the target, not the exclusion of actions. By doing that it means we can continue to be financed. Clearly we have access to a lot of financing that doesn’t have any exclusion relating to the development of upstream.
Therefore there is access to capital that is linked more pragmatically with the concept of having a plan of transition, rather than just declaring you do not finance this or that activity. I don’t know what is the rationale behind the UniCredit plan but each company has its own plan. We met a bank an hour ago and they confirmed they have a completely different approach, so there is no real constraint from this.