Bottom Line: National Power's shining example
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Your support makes all the difference.SECURITY in the international bond markets has as many holes as a piece of Emmenthaler cheese. So it was no great surprise to see National Power launch its much rumoured convertible bond issue yesterday morning led by Credit Suisse First Boston and J Henry Schroder Wagg.
Once the report by Offer, the industry regulator, on the big two generators' role in recent electricity pool price rises was out of the way last Friday and the exchange rate mechanism had in effect dismantled itself over the weekend, National Power felt able to flick the switch on the issue.
The bulk of the pounds 250m issue, increased from an initial pounds 225m, has gone to UK investment institutions and Swiss investors. It is a clear reminder of how attractive the UK market now looks to domestic and European investors and of the current healthy appetite for convertible issues.
The market showed how receptive it is to this kind of instrument by accepting a conversion premium of almost 19 per cent after the conversion price was fixed at 433p compared with a mid-morning market price of 364p. This is the top end of the 16-19 per cent range of recent premiums.
European investors have little opportunity to invest in low-risk local utilities with the exception of the large French water companies, which is an added attraction of the National Power issue.
Despite the statutory sabre-rattling by Offer over references to the Monopolies and Mergers Commission in its pool price report, regulatory risk for the UK generators is not overwhelming while the ability to cut costs further and generate substantial cash in the future is undeniable.
For National Power the issue, although diluting existing share capital and the Government's 40 per cent remaining share stake by 4 per cent, is certain to enhance earnings. A 6.25 per cent coupon is cheap whether it is applied to the company's pounds 1bn investment plans for equity stakes in overseas power projects, on which it must expect returns above 20 per cent, or to help buy back pounds 350m of debt held by the Government carrying a coupon of 12 per cent.
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