RWE AG Bonds Issuance
on 20 September 2010
On 20 September 2010, RWE issued a hybrid bond with a volume of €1.75 billion.This makes it the biggest euro hybrid bond ever issued in Europe by an industrial company. The bond met with keen interest from investors and was soon well oversubscribed.The initial coupon is worth 4.625% p.a. with an issuance rate of 99.7%.
IR Release on bond issuance on 20 September 2010
The hybrid bond is a mix of equity and debt and thus offers a higher coupon than conventional bonds. It theoretically has an unlimited tenor, but RWE does have the right to repayment after a period of five years. The minimum purchase volume for the bonds is just €1,000, which makes them attractive to both institutional and private investors, who will be able to purchase the bonds via their banks. The joint lead managers were BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley and Royal Bank of Scotland.
Frequently Asked Questions
We answer all frequently asked questions on hybrid bonds in general and the hybrid bond placement on September 20, 2010 in the following chapters.
Please understand that this information cannot replace a comprehensive risk consulting session, e.g. with your financial advisor.
What exactly is a “hybrid bond?”
Bonds classified as “hybrid” are a mixture of debt and equity. Whereas the hybrid starts out with a fixed interest rate, its tenor is basically unlimited, in line with the bond conditions. Interest payments can be suspended for any year in which no dividend is paid and no shares are bought back. In addition, in the event of an insolvency, the bond shall be serviced only after all other obligations have been met and only before the shareholders. This corresponds to the treatment of equity, i.e. of a share.
Is the hybrid bond a junior security? And if so, what does that mean?
The hybrid bond is a junior security. In the event of an insolvency or liquidation, it is given less priority than a “normal” bond. Receivables from the company arising from hybrid bonds are serviced only after the company has fulfilled all the other obligations it has to third parties and are given priority only over shares.
How does a hybrid bond differ from a regular bond?
A hybrid bond’s main discerning feature is that it has an unlimited tenor. It can be cancelled one-sidedly and repaid only by the company. The precise modalities are established in the bond conditions. Interest payments can be suspended for any year in which no dividend is paid and no shares are bought back. In addition, hybrid bonds are junior, which means that in the event of an insolvency or liquidation, they are serviced only after all other obligations (including those related to other RWE bonds) have been met. Therefore, as bond purchasers do not know exactly when they will get their money back and are exposed to a risk that is higher than that of a regular bond due to the lower priority, the interest rate on a hybrid bond is much higher than that of a “normal” bond.
What risks are investors confronted with when subscribing hybrid bonds as opposed to regular bonds?
The major risks are:
- the undefined tenor;
- the “subordinate” treatment: In the event of the company’s insolvency or liquidation, one is given priority only over shareholders and all other receivables are given preferential treatment;
- the suspension of interest payments: Under certain conditions, interest payments may be suspended, e.g. in cases where no dividend is paid. However, accrued interest must be paid retrospectively once the dividend payment is resumed or the hybrid bond is repaid.
Please understand that this information cannot replace a comprehensive risk consulting session, e.g. with your financial advisor.
When do the interest payments start?
The annual interest payment date of the hybrid bond placed on September 20, 2010 is September 28.
Why is the return on a hybrid bond higher than on a conventional bond?
Because it bears a higher risk—in terms of its tenor, interest payment and the treatment of the creditor/buyer in the event of the issuer’s insolvency.
When can private investors start subscribing the bond?
Private investors can subscribe the bond as soon as it has been listed.
What is the hybrid bond’s German securities identification number and ISIN?
The German securities identification number is A1EWRO and the ISIN is XS 542298012.
