Terna is a regulated electricity transmission utility with a strong business-risk profile: essential infrastructure, natural monopoly characteristics, predictable regulated revenue, and stable profitability. Revenue grew about 14% in 2022, operating profit rose about 11%, and operating cash flow was very strong at €2.32 billion. This supports a relatively resilient credit profile.

However, the company is also highly capital intensive. 2022 investing cash outflow was €1.86 billion, including about €1.49 billion of property, plant and equipment purchases and €212 million of intangible investments. This reflects a large regulated grid investment program. Free operating cash flow after capex was positive but only modest relative to dividends and financing needs. Gross borrowings remain substantial: long-term borrowings of €8.42 billion, current portion of long-term borrowings of €1.91 billion, and short-term borrowings of €0.44 billion at year-end 2022/early 2023, partly offset by €2.16 billion cash.

Terna already issued €989 million of perpetual hybrid bonds in 2022, recorded in equity, with coupon payments of €21.1 million. This is important: hybrid capital is already part of the capital structure, so the question is not whether to introduce hybrids from zero, but whether to expand usage toward S&P’s 15% equity-credit cap.

A simplified starting-point view suggests total adjusted capital of roughly equity plus debt of about €17 billion-€18 billion before any further hybrid adjustment. The existing €989 million hybrid is therefore around 5%-6% of total adjusted capital, below the 15% S&P cap. Moving to 7.5% would require only a moderate additional issuance; moving to 11.25% would require a larger but feasible issuance; moving to 15% would likely require around €1.6 billion-€1.8 billion more, still below the assumed €3 billion annual issuance capacity. Therefore, capacity is not the constraint.

The main considerations are need and cost. Refinancing needs are meaningful, given over €2.3 billion of short-term borrowings and current maturities, and capex intensity is high. Hybrid issuance would support adjusted leverage metrics and rating flexibility, especially because regulated utilities are assessed heavily on FFO/debt and debt/capital measures. That said, there is no evidence of acute downgrade risk or transformational M&A. Operating cash flow is strong, cash balances are high, and the regulated business profile provides stability. This argues against using the full 15% cap.

Market conditions also argue for moderation. Euro swap rates rose sharply in 2022, with 7-10 year swaps around 1.8%-1.9% versus near zero in 2021, and subordinated/nonfinancial IG spreads also widened. A new hybrid would likely be meaningfully more expensive than Terna’s historical senior debt cost. The cost penalty is not prohibitive for a regulated utility with long-duration assets, but it makes maximum-cap issuance less attractive unless rating preservation depends on it.

Overall, Terna has a clear rationale for additional hybrid bonds: high regulated capex, sizeable refinancing needs, and an existing hybrid capital structure that can be expanded efficiently. But the company’s strong regulated profile, robust cash generation, substantial liquidity, and absence of immediate severe leverage stress suggest it should not maximize hybrid usage. A target of 7.5% of total adjusted capital is the most balanced option: it modestly increases hybrid support above the current ~5%-6% level, provides meaningful rating flexibility, and avoids excessive reliance on costly subordinated capital.

<answer>7.5%</answer>