M&A in Clean-Energy Loving Germany Could Sully Green Bonds

(Bloomberg) -- Angela Merkel’s clean-energy push may turn out to be less ‘green’ than expected for bondholders caught up in the upheaval of Germany’s energy industry.

In the latest redrawing of the power map as the nation moves away from nuclear and fossil fuels, EON SE will take over Innogy SE from rival RWE AG, along with 850 million euros ($1 billion) of green bonds sold by Innogy Finance BV in October to finance wind farms.

The green credentials of those bonds are now up in the air, according to the firm which gave the securities their environmentally-friendly label.

“Should an issuer undergo a significant organizational change such as a merger or an acquisition, Sustainalytics would reevaluate its second party opinion on the green bond, including the new firm’s sustainability strategy,” a spokeswoman for the research and ratings provider told Bloomberg News by email.

EON spokesman Carsten Thomsen-Bendixen declined to comment on what will happen to the green bond after it takes over Innogy’s debt.

The deal values Innogy at about 22 billion euros in equity and about 43 billion euros including debt, and is one of the jigsaw pieces of German Chancellor Merkel’s clean-energy vision.

Since the agreement in March, risk premiums on Innogy’s bonds have jumped to 95 basis points from 77 basis points.

The problem may arise because Innogy’s own renewables assets plus EON’s green-energy business will devolve to RWE. The orphaned Innogy bonds may eventually join too, said ING Bank NV credit analyst Nadege Tillier.

Downgrade Risk

As a liability of EON, the bonds are subject to dirty energy risk and the loss of their green label. But returning to RWE could mean Innogy’s bonds are downgraded in line with RWE’s lower rating of Baa3, she said.

“RWE has a different business profile and is rated one notch below Innogy,” Tillier wrote in a note earlier this month.

Still, there are plenty of ways EON could try to hang onto the bond’s green credentials. The company could tie the bond up with other environmentally-friendly activities, like a grid upgrade as part of the country’s transition to a low-carbon economy or smart home technology.

The developments are being closely watched by the 255-billion euro green bond market where utilities have an outsized representation, even though it may be years before there’s any resolution, according to ING. Innogy’s securities are due in 2027.

"As the market is becoming more mature, it will probably lead to more special cases in the future, and Innogy is one of them," Tillier said. “The case will certainly be answered one way or the other, but the company has at least two years before the full integration happens.”

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