# Hybrid Bond Issuance Assessment for Ørsted A/S

## Company Overview
Ørsted A/S is a Danish renewable energy company, state-owned through the Danish Ministry of Finance. The company operates as an unregulated power and gas generator with significant renewable energy assets (wind, solar, etc.).

## Current Capital Structure Analysis

**As of December 31, 2022:**
- Total Equity: 95,532 million DKK
- Hybrid Capital: 19,793 million DKK
- Equity Attributable to Owners of Parent: 71,743 million DKK
- Long-term Borrowings: 60,451 million DKK
- Short-term Borrowings: 2,830 million DKK
- Total Debt: 63,281 million DKK

**Adjusted Capital Calculation:**
- Total Adjusted Capital = Equity + Adjusted Debt = 95,532 + 63,281 = 158,813 million DKK
- Current Hybrid Capital as % of Adjusted Capital = 19,793 / 158,813 = **12.5%**

The company already has substantial hybrid capital outstanding, representing approximately 12.5% of total adjusted capital, which is near the upper end of S&P's acceptable range.

## Financial Profile Assessment

### Business Risk Factors:

1. **Unregulated Power & Gas Sector:** Ørsted operates primarily in renewable energy generation (wind, solar), which is exposed to:
   - Market price volatility
   - Policy/regulatory changes (green energy support mechanisms)
   - Technology/energy transition risks
   - Weather/resource variability

2. **Competitive Advantages:**
   - Strong geographic diversification (UK, Germany, Denmark, Poland, Netherlands, US, Taiwan)
   - Diversified renewable asset portfolio (wind, solar)
   - State backing provides implicit support
   - Large scale relative to peers
   - Some long-term contracted revenue through PPAs and feed-in tariffs

3. **Asset Profile:**
   - Production Assets: 119,211 million DKK (growing from 95,618 in 2021)
   - Construction in Progress: 48,931 million DKK (represents significant ongoing capex)
   - Total Property, Plant & Equipment: 177,665 million DKK
   - This reflects substantial capital intensity

### Financial Performance (2022):

**Profitability Metrics:**
- Revenue: 132,277 million DKK (up 70% YoY)
- EBITDA (EBIT + D&A): 19,774 + 12,283 = 32,057 million DKK
- EBITDA Margin: 32,057 / 132,277 = **24.2%** (healthy)
- Net Profit: 14,996 million DKK
- Net Income Attributable to Parent: 14,549 million DKK

**Cash Flow Analysis:**
- Operating Cash Flow: 11,924 million DKK
- Capex (PP&E + Intangibles): 33,004 million DKK
- Free Cash Flow: 11,924 - 33,004 = **-21,080 million DKK** (negative)
- This indicates significant capital consumption

**Leverage Metrics:**
- Total Debt: 63,281 million DKK
- Total Adjusted Capital: 158,813 million DKK
- Debt to Adjusted Capital: 63,281 / 158,813 = **39.8%**
- Equity Ratio: 95,532 / 314,142 = **30.4%**
- Interest Expense: 18,050 million DKK
- Interest Coverage (EBIT/Interest): 19,774 / 18,050 = **1.10x** (tight)

### Capex & Funding Requirements:

**Capital Intensity:**
- 2022 Capex: 33,004 million DKK (24.9% of revenue)
- 2021 Capex: 34,569 million DKK (44.5% of revenue)
- Construction in Progress: 48,931 million DKK (significant ongoing projects)

The company is in a high capex phase, consistent with renewable energy infrastructure buildout. This represents substantial funding needs for the next 3-5 years.

**Financing Activities (2022):**
- Proceeds from Borrowings: 37,090 million DKK
- Repayments of Borrowings: 22,595 million DKK
- Hybrid Capital Issuance: 3,693 million DKK
- Hybrid Capital Repurchase: 1,945 million DKK
- Dividend Payments: 5,252 million DKK (to parent)

The company has already issued approximately 3.7 billion DKK in hybrid capital in 2022, demonstrating active use of this instrument.

### Leverage & Rating Profile:

**Current Leverage Metrics:**
- Net Debt: 63,281 - 16,178 = 47,103 million DKK
- Net Debt / Equity: 47,103 / 95,532 = **49.3%**
- Net Debt / EBITDA: 47,103 / 32,057 = **1.47x**
- Debt / EBITDA: 63,281 / 32,057 = **1.97x**

**Rating Considerations:**
- Interest coverage of 1.10x is tight for investment grade (typically >2.0x is preferred)
- High capex phase creates near-term refinancing/funding pressure
- State ownership provides some implicit support but doesn't guarantee rating support
- Unregulated renewable generation creates earnings volatility risk
- Credit metrics are under pressure but manageable

## Hybrid Bond Market Context

**Market Conditions (2022):**
- 5Y Swap Rate: 1.726% (significantly elevated from 2021 at -0.264%)
- 10Y Swap Rate: 1.927% (elevated from 2021 at 0.053%)
- iShares Core Euro Corp Bond Yield: 1.085%
- Sub-senior Delta (Hybrid Premium): 2.295% (elevated)
- Combined Hybrid Cost: ~4.2% (1.927% + 2.295%)

This compares to the company's senior debt cost of approximately 2-3%, making hybrids ~120-220 basis points more expensive. This is material given tight interest coverage.

## Assessment Against Guidance Criteria

### Arguments Against Significant Hybrid Issuance (0%-7.5%):

1. **Already High Hybrid Level:** Current 12.5% of adjusted capital is already substantial and near the S&P cap
2. **Tight Interest Coverage:** 1.10x EBIT/Interest leaves little room for additional financing costs
3. **Rising Rate Environment:** 2022 marked a sharp increase in funding costs; hybrid premiums are elevated
4. **Cost of Hybrids:** Additional 120+ bps premium over senior debt materially increases weighted average cost
5. **Negative FCF:** Operating cash flow insufficient to cover capex; company relies on external financing
6. **Near-Term Refinancing Risk:** With significant near-term debt maturities expected, additional hybrid issuance at high cost is suboptimal

### Arguments For Modest Hybrid Issuance (7.5%-11.25%):

1. **Capex Funding Needs:** 30+ billion DKK annual capex requires continued capital access
2. **Leverage Optimization:** Some hybrid benefit to debt/equity metrics given construction phase
3. **Rating Flexibility:** Modest hybrid issuance (up to 15% cap) provides leverage headroom
4. **Already Issuing:** Company demonstrated comfort with hybrid markets in 2022
5. **State Ownership:** Implicit support may justify modest hybrid reliance
6. **Unregulated Risk:** Hybrid equity credit useful given earnings volatility from unregulated operations

### Arguments Against Further Hybrid Issuance (pointing to 0%):

1. **Cost Penalty:** High hybrid costs (4.2% vs 2-3% senior debt) materially increases debt service
2. **Modest Benefit:** At current 12.5%, company already captures most hybrid equity credit benefit
3. **Senior Debt Preferable:** In high-rate environment, term loans/bonds are more efficient
4. **Rating Stability:** Current metrics (1.97x Net Debt/EBITDA) do not require hybrid support for stability
5. **Equity Support Available:** Strong state ownership suggests equity capital raising is alternative

## Conclusion

Ørsted faces **moderate to high capex needs** (33 billion DKK annually) but operates in a **challenging financing environment** with:
- Elevated hybrid costs (4.2% all-in)
- Tight interest coverage (1.10x)
- Significant near-term funding requirements
- Already substantial hybrid capital (12.5% of adjusted capital)

The company has **limited headroom** under the 15% S&P cap (only 2.5% available capacity). Given:
- The cost of hybrids in the current environment
- The tight interest coverage profile
- The company's already-substantial hybrid position
- The preference for cheaper senior debt in rising rate environments

**The company should maintain its current hybrid level and not substantially increase hybrid issuance.** The 2022 issuance of 3.7 billion DKK (approaching the 3 billion annual limit) may have been opportunistic given market window. Going forward, the company should prioritize:
1. Senior debt issuance at lower cost
2. Equity capital from state owner if needed
3. Operational deleveraging as construction phase moderates

Issuing at the 7.5% level (additional 9.2 billion DKK hybrid) would push total hybrids to 29 billion DKK or 18.3% of adjusted capital—exceeding S&P's 15% cap and creating excessive refinancing cost burden.

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