EDF’s $27 Billion of Nuclear Bonds Seen as Template: U.K. Credit

By Sally Bakewell

Electricite de France SA’s plan to raise as much as 17 billion pounds ($27 billion) of bonds for Britain’s first nuclear project in two decades is being seen as a template for financing expansion in the industry.
EDF won approval from the European Commission last week to build the 24.5 billion-pound plant at Hinkley Point in southwest England, a year after agreeing to the project. The U.K. government will back the debt, which will be the nation’s largest bond offering on a single project, according to Deloitte LLP.
“The use of bonds with a U.K. government guarantee will be a highly influential template in the nuclear sector,”Kevin Magner, director for corporate finance in
the government and infrastructure team at Deloitte, said by phone. “For projects of this sheer size which developers can’t finance on their balance sheets, they’re turning more to the bond market for large volumes of debt where the projects can achieve the necessary credit quality.”
Other nuclear projects that may follow include Hitachi Ltd.’s plan to build 5.4 gigawatts of plants at sites in Wales and south Gloucestershire, and a power station with as much as 3.4 gigawatts in west Cumbria being developed by a venture between Toshiba Corp. and GDF Suez SA, Magner said. The U.K. government announced a program in July 2012 to offer as much as 40 billion pounds in debt guarantees for infrastructure projects to lift the economy.

Photographer: Jason Alden/Bloomberg

Electricity pylons stand near the Dungeness B nuclear power plant, operated by... Read More

‘Big Market’

“There will be a big market for this debt since it’s guaranteed by the government,” Andrew Moulder, an analyst at CreditSights Inc. in London, said by phone. “It will depend on how it’s structured and how it’s sold to the market, but if it’s going to be guaranteed by the government then it’s pretty much as safe as government debt.”
In exchange for government backing, EDF will pay a fee to the U.K. Treasury at market rates. The European Commission said in an e-mailed statement on Oct. 8 that the proposed fee was too low for a project with such a “risk profile” and “significantly raised” the premium, lowering a subsidy to support the project by more than 1 billion pounds.
“It’s not the same as building a road or a railway,” said Moulder. “You’ve got all of the big safety concerns, the potential of delays, and risks to construction are far higher. Investors will want more security around that.”
EDF declined to comment on the financing strategy.

New Stakeholders

EDF, along with Areva SA and two Chinese nuclear companies, agreed a year ago to construct the plant after the U.K. government offered to buy electricity at a price that’s almost double today’s market rate under a 35-year contract.
The Paris-based utility plans to bring in new investors by December to take as much as 15 percent of Hinkley Point, Herve Machenaud, group senior executive vice president for generation at EDF, said in an Oct. 9 interview. The company said last year it would own 45 percent to 50 percent of the plant, with China General Nuclear Power Corp. and China National Nuclear Corp. getting 30 percent to 40 percent, and Areva 10 percent.
Renewing the nuclear industry is central to Prime Minister David Cameron’s plans for generating low-carbon power as all but one of Britain’s atomic plants are due to close by 2023.
Developers of infrastructure projects are going to the bond market as banks curb lending to meet new capital requirements.
Borrowers raised more than 7.3 billion euros ($9.3 billion) for European projects in the first six months after drumming up 15.4 billion euros for all of 2013, according to data from the Inframation Group in London, which supplies research for the infrastructure finance industry.
“Since the financial crisis reduced capacity in the bank market, institutional investors have become much more significant for infrastructure projects,” said Deloitte’s Magner. “That’s a continuing trend.”