VERBUND AG should make little to no use of hybrid bonds over the next 18 months.

Key considerations:

- **No prior hybrid issuance:** VERBUND had no hybrid bonds outstanding and had never issued hybrids. This is a strong signal under the guidance that the company has historically had no need or preference for hybrid capital, and this should weigh heavily against a high recommendation.

- **Strong credit metrics:** S&P net debt / EBITDA was only **1.6x** in 2022, while S&P FFO / net debt was **51.7%**. These are strong metrics for a utility/power group and suggest substantial financial flexibility without needing hybrid equity credit.

- **Improving earnings and cash flow:** EBITDA doubled from about **€1.58bn in 2021** to **€3.16bn in 2022**, and operating cash flow increased sharply to about **€2.02bn**. Although working capital and derivatives caused volatility, the core earnings base strengthened materially.

- **Capex and investment needs are meaningful but manageable:** Investing cash outflow was about **€1.59bn** in 2022, including over **€1.09bn** of PPE/intangible capex and about **€479m** for acquisitions. This indicates sizeable investment needs, but not a transformational funding requirement relative to EBITDA, equity, and cash flow generation.

- **Leverage trend is deteriorating, but from a strong base:** Moody’s adjusted leverage trend is noted as deteriorating, and financial liabilities increased. However, the absolute leverage level remains moderate, and the company’s equity base increased to **€8.32bn** at year-end 2022.

- **Cost environment is unfavorable for hybrids:** Euro swap rates rose sharply in 2022, with 5–10 year swaps around **1.7%–1.9%**, and subordinated non-financial IG spreads around **2.3%**. A new hybrid would likely be materially more expensive than VERBUND’s existing senior debt cost, making issuance less attractive unless rating preservation required it.

- **Business profile is supportive:** VERBUND benefits from a strong position in essential electricity infrastructure and generation, including regulated grid revenue and a large low-carbon hydro-heavy asset base. While merchant power exposure creates some volatility, the company does not appear to face immediate pressure that would make hybrid issuance necessary.

Given the absence of prior hybrid issuance, strong leverage and FFO metrics, and the high relative cost of issuing subordinated capital in 2022–2023 market conditions, hybrid bonds are not necessary. A small issuance could provide optional flexibility, but the guidance explicitly treats no prior hybrid issuance as a strong indicator against future issuance. Therefore, the most appropriate recommendation is **0% of total adjusted capital**.

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