Letter number 143 of July 2022
- QUESTIONS & COMMENTS
We are pleased to announce that the sixth edition of The Vernimmen is now available from all good bookstores and on-line retailers.
With thousands of copies of the latest edition sold, Corporate Finance, Theory and Practice is one of the most popular financial textbook, thanks to its four unique features:
• A balanced blend of theory and practice: authors hold academic positions at top ranking business schools and are also investment banker, private equity investor or sit on the boards of listed and unlisted companies.
• A presentation of concepts that explain situations, followed by a discussion of techniques in a direct and succinct style.
• Content enriched by the www.vernimmen.com website, which is one of the leading finance teaching sites worldwide.
• Free monthly updates on finance through The Vernimmen.com Newsletters, with over 70,000 subscribers.
Corporate finance is evolving in an environment that is undergoing irreversible change due to the rise of environmental, social and governance concerns in society. This evolution naturally and durably affects corporate finance. Rather than devote a chapter to it, which would run the risk of being a self-righteous ghetto, we have preferred to infuse the whole of Vernimmen with these concerns, which seem to us to be as major for corporate finance as the advent of market finance was 40 years ago.
It encompasses products (sustainability-linked
bonds or loans, green bonds, etc.), tools (environmental P&L, carboned EPS) and behaviors that appeared and developed recently due to the pressing need for energy transition. As an example, we answer this question: Should we reduce the cost of capital of a project that benefit the planet and is financed by sustainable financial tools at a lower cost than a plain vanilla debt? Our answer, contrary to the classical view which assumes that investing and financing decisions are separated is: Yes. We do think that helping the planet is a duty and this is well worth a departure from financial orthodoxy.
For this edition a new chapter was also created on the financial organisation of groups: Should you be listed? Should your subsidiaries be listed? Should you be a minority shareholder? Have minority shareholders or control 100% of your subsidiaries? Be diversified? Where should the group's net debt be located? Which entities should be indebted? How should the group be organised internally: with geographical or business holding companies? These are the questions that this new chapter answers. The summary of this new chapter is available here.
We have also done a major updating job to create a tool that is accurate, reliable, comprehensive and relevant. We have included the very latest accounting standards, statistics and graphs are updated, the latest innovations in financial practice are discussed and the latest financial theories are presented.
To make sure that you get the most out of your Vernimmen, each chapter ends with a summary, a series of problems and questions (832) (solutions provided). For those interested in exploring the topics discussed in greater depth, there is an end-of-chapter bibliography and suggestions for further reading, covering fundamental research papers, articles in the press and published books. A large number of graphics and tables (over 100) have been included in both the appendix and in the body of the text which can be used for comparative analyses. There are over 3,500 entries in the index.
What they said about The Vernimmen:
“I discovered finance with ‘The Vernimmen’ about 30 years ago. Since then the different versions have accompanied me throughout my career and throughout the world. Not only was the alignment of the successive editions looking good in my different offices but I must confess I have opened and cherished each of them. Whether an investment banker, a CFO in a universal bank or more simply a world banker…”
Bertrand Badré, Former Managing Director and CFO of the World Bank, founder of the Blue like an orange sustainable fund
“What sets the Vernimmen apart from other textbooks is its integration of practice and current affairs in a rigorous theoretical framework. Recipes and pontification are replaced by a scientific approach. And, thanks to the Newsletter, this is done practically in real time!”
Christophe Evers, Professor of Finance at the Solvay Brussels School, Executive Director of Texaf
"Vernimmen provided people like me who were new to the world corporate finance a perfect mix of theory and practical examples to help them develop long lasting financial concepts. The book is a written manual for finance, explaining the fundamentals in a very thought provoking way, making it intriguing to delve into the complexities. This book is a must have in your personal library as you will refer back to it even after years."
Sharat Gangwani, Head of Research Systems
at Citadel LLC
“Vernimmen's Corporate Finance is an outstanding clear and complete manual, a wonderful merger of practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its treatment of all the material makes it essential reading for the student, financier or industrialist.”
Howard Jones, Senior Research Fellow in Finance at Saïd Business School, University of Oxford
“The book itself covers all the important techniques that a financial manager must have in his repertoire of tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning throughout. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity.”
Richard Roll, Joel Fried Professor of Applied Finance at UCLA Anderson
Emmanuel Hasbanian, Managing Director at Deutsche Bank, was part of the round table organised for the launch of the 6th edition of the Vernimmen. The following is a transcript of these exchanges.
Are SPACs ("Special Purpose Acquisition Companies") occupying a vacant space between the traditional IPO and private equity?
Finance is a subject that evolves. SPACs are one of these new products, even though the product itself is quite old, they're now coming to the forefront. So, I'm glad to be able to talk about them.
It turns out that this is a product that has been "sold" at Deutsche Bank a lot and for many years. In 2020-2021, Deutsche Bank led more than 80 SPAC transactions worldwide. There have been 6 SPACs in France over the last few years, and we've been lucky enough to manage two thirds of them. It's a subject that interests us a lot and one that's constantly evolving. So, the question is very interesting because we wonder why this product is coming to the forefront today. Does it meet needs that weren't covered before? Or is this just a market development?
Before answering, I'd like to repeat what SPAC stands for - Special Purpose Acquisition Company. It is in fact a newly created company with no operational activity that goes public to raise money for one or more acquisitions of companies that, at the time of the SPAC listing, are not clearly identified.
There are therefore two stages in this definition. We have the period when the empty shell vehicle, we'll call it like that, is listed and the period when the acquisition takes place, which is called the business combination or despacking. I think that in order to answer the question, you have to bear in mind the two periods, and in particular the second one, which is just as important, if not more important than the first. And finally, a successful SPAC is not just a listing, it also involves despacking. From the point of view of the seller, from the point of view of the shareholder of the company that is going to be sold or that is going to merge with the SPAC, we have a stock market listing process and therefore we're involved in the stock market, we involve the public investors that we're talking about. The company transferred to SPAC is a company that becomes a listed object. This is the world of the Initial Public Offering (IPO).
However, the process that the seller, the shareholder of the company sold, will follow is more like an M&A process than an IPO process. In fact, bilateral discussions will take place between the seller and the SPAC sponsors. There are due diligence exercises, there are negotiations, so we're really talking about an M&A process.
In this sense, a SPAC can be seen as part of the continuum between listed companies, private equity, private exchanges, private M&A.
Critics of the SPAC often point out that it's ultimately a way of circumventing the regulatory constraints on listing on the stock market, through a vehicle that's listed without any constraints on presentation of the business, since there is no business, and then making an acquisition that allows it to be listed on the stock market without having to produce a history of accounts and all the prospectuses.
This is a legitimate question. But which I think is unfounded. I prefer to present the SPAC as another way of being listed on the stock exchange, rather than as a way of circumventing legislation. Already, with regard to legislation, I must say that the SPAC product is perfectly well regulated. We're fortunate in France, thanks to the AMF, which has been at the forefront of all these issues, to have a working environment and a legal framework that is very clearly defined.
The AMF would obviously not allow vehicles to be listed that were there solely to take advantage of a market loophole and list on the stock exchange without passing through required formalities of a normal listing. Indeed, when the company is listed, it is an empty shell. It has no accounts to present, it has no activity to talk about. And so, obviously, there are a lot of things that you would expect to see in a prospectus of a listed company that do not appear in the prospectus of a SPAC, by definition.
But as I said earlier, the important step in SPAC is not so much fundraising as despacking. And this is when that the information is provided. On this point, the AMF (I'm talking about the French market, but this is also true in other jurisdictions) is particularly vigilant about the transparency, sincerity and comprehensiveness of the information provided. So, the argument that "we're listing a company on the stock market that would not have succeeded in going public through natural channels" is not a good argument, since it remains an exercise in supply and demand. This means that if investors are not keen on the SPAC being listed, not only do those with stakes in the SPAC have the option of requesting repayment of their shares, and are therefore able to exit the SPAC, but also, in order to replace them, capital must be raised. If the SPAC to be listed is not desirable or is not appropriately valued, it will be difficult to find investors to replace those who leave. And so, in the end, we have an exercise in supply and demand that can only take place if the demand is there. And for the demand to be there, the information must be comprehensive, exhaustive and well presented. And so, this is not a circumvention of the law. Clearly not, but rather another way of carrying out an IPO.
Is it an investment product for small shareholders?
I have a very strong opinion on this issue and fortunately the legislative framework is moving in that direction. I don't think this is a product for small shareholders. Moreover, if we look at the IPOs of SPACs that take place in France, they take place on the professional segment of the Paris Stock Exchange for minimum tickets of one million euros. Accordingly, we're addressing qualified investors and small shareholders are not invited to participate in SPACs at the time of listing. And this is because it's a complex product, and a somewhat new one at that. It's not a diversification product, a good family product, into which you're going to put your life savings. No, it's really a financial vehicle that will have an industrial, operational, etc. vocation. But above all, it is a particularly technical financial product, and therefore the small shareholder must be protected. And they do not participate, at least in France, in fundraising.
Whether this is a fashion effect or not, we have two quite different dynamics in the United States, with a market that seems less heated or at least, that could potentially stall. In contrast, in Europe, there are relatively few operations. We have a few more this year with six times more than we've had so far.
What are the dynamics of SPACs in the market? Is this a passing fad or is it simply a realignment of the market that has been too active in the US?
I think SPACs have often been associated with the term bubble. And when you see the volumes that have been raised over the last few years, I think it is quite legitimate to ask the question. So, on the question: "Is this a passing fad?" In fact, SPACs have been around for several decades, but are less well-known in Europe because it is essentially a North American product.
But it's a product that has been around for a long time and that we know. I'm going to use the term "bubble" again, which we heard in particular at the time of the dotcom bubble in the early 2000s, when a lot of SPACs were listed on the stock exchange precisely to bring companies from this dotcom bubble onto the stock market. I don't think it's a fad, but yes it is true that volumes in the US have been huge in recent years.
I think that in 2020 there were around $80 billion in issues. The $80 billion was found in 2021, as early as March, and we are now at $130, $140 or $150 billion raised in the United States. I've stopped counting. So yes, there's a lot of money that's been raised in SPACs. It is in this sense that there may be a slowdown. What does that mean? When you raise money, (and I always come back to the idea that a SPAC is a two-step process), you have to find investments to put against the money you raise. And so, there is a desire on the part of investors today to see this money used, and used for the purpose for which it was intended. And so, in this sense, there is a slowdown. Volumes are very large, so we can' say that there's a market stall. But there is nevertheless a slight slowdown in the US, with some negative press on certain aspects emerging because some SPACs have underperformed. However, this stems from the fact that investors, before redeploying capital for some of them, want to get back what they may have put into existing SPACs or at least see some despacking.
In Europe, this is not the case. In Europe, we're still in the investment phase with volumes that are also much lower. There has already been some despacking in Europe but we're a little further upstream of the US.
Will the European market develop?
I see it developing. And in discussions we have with potential issuers, we clearly see this market developing. It will develop when the stars are aligned, and they are well aligned in France with a framework set by the AMF that is very clear. The AMF has acted upstream and continues to monitor this market very closely. We have a particularly large pool of unlisted companies in France, so there's a very large number of targets.
We mustn't forget that the shares of a company that despacks, as I said earlier, are traded on the stock exchange and they're traded on the stock exchange on which the SPAC is listed. In other words, when a SPAC is listed in Paris, companies that despack by selling or merging with a SPAC will de facto be listed in Paris, and so we have to look at the targets in France. In France, we have a particularly large pool of investors, companies and founders. We have this legislative framework, this regulatory framework which is particularly promising. And so, I think that the SPAC product in France, and in Europe in general, will continue to develop.
It turns out that not all European markets have been as advanced as France in accepting and understanding the SPAC product. The other successful market in Europe is Amsterdam. The London Stock Exchange, one might think, because the UK is a major English-speaking country with a very important financial centre, could be a good market for SPACs. Well, no, there are no SPACs in the UK, because regulations, until recently, meant that the SPAC product couldn't work. This is changing. This kind of development should ensure that the product will continue to grow.
I'm quite confident, because there's a real interest in it. This is another way of doing IPOs. This is a fast-track way to do IPOs. It gives access to some companies that might otherwise have difficulties. I think it is a very good product.
One of the criticisms that has been levelled against SPACs, especially recently, is that they contribute to the rise in tech stocks. Is the SPAC craze responsible or is it contributing to the technology valuation bubble that we had and stopped a few months ago?
I think that valuation inflation is across the board, as they say. It affects almost all sectors of activity. There was an IPO in the US of a car company that you may have heard of, called Rivian, which went public through a traditional IPO, whose market capitalisation was over $140 billion. This puts Rivian, which produces electric vehicles, behind Tesla and Toyota, and ahead of all other car companies in the world. But you won't have seen any Rivian cars on the street. That's perfectly normal, you can't see any, because Rivian hadn't sold a single car. $140 billion. So, I don't think we can say that the SPAC is the culprit behind valuation inflation.
Where I think SPACs can be useful is in establishing a somewhat objective valuation. And here I'm going to take a step back and talk about the IPO process versus the despacking process. In an IPO, the management of a company has, roughly speaking, 1 x one hour, or 2 x one hour, or 2 x 45 minutes to convince the various investors they meet during a roadshow, of the relevance of its market, its equity story, its model, in order to hope, on that basis, that the investor will place an order.
The investor is going to have to, on the basis of two 45-minute sessions, or one hour, and on the basis of the work that he or she will be able to do elsewhere, form an opinion not only on the underlying market, on the activity of the company, on the management, etc., but also on its valuation, and therefore investors are asked to have a relatively clear-cut opinion on a question which is eminently complex. And it's complex, all the more so because we're talking about companies that have no comparable companies in the market, that are in new markets in the making, that have very strong growth prospects. And therefore, we cannot rely on historical performance. It's very difficult for an investor to form an opinion on this.
Why do I say that a SPAC allows you to put a value on these companies? In fact, the despacking process is more like an M&A process. And how will the IPO of the company I mentioned above work out in the case of despacking? In fact, what will happen is that the seller will talk to the SPAC sponsors. If SPAC is done well, the sponsors are normally people who know the industry in question, or at least the ecosystem around that industry.
If we're talking about a tech company, they're going to have a very high degree of sensitivity to these issues. They'll do due diligence on the market, on the management, on the company. They'll have access to much more information than the investor in an IPO. They'll seek the help of third parties, external consultants, diverse and varied, and it's on this basis that they'll negotiate a valuation with the seller. When an agreement is reached, it's presented to investors. From the point of view of the investor who's asked whether or not to follow this despacking, the decision is greatly facilitated by the fact that the due diligence has been done by competent management. And so, I don't know if it contributes to valuation inflation. I'd rather say that it allows us to objectify or put a value on objects that would otherwise have greater difficulty in finding an objective valuation in a classic IPO process.
What's the purpose of SPAC management? Since a SPAC is intended to acquire or merge with a company that already has management and therefore technically can't have an additional layer. So, in the end, SPAC management is only used for this due diligence and negotiation phase?
It is primarily used for this origination, due diligence and negotiation phase. But it can then bring incremental competence to the management in place. Sometimes it replaces management too, i.e. we can have companies that come to the stock market with a management team which was absolutely perfect while the company was private, and which needs new blood, new skills at the time of despacking. Then SPAC management can replace target management. Nevertheless, there are cases where management doesn't replace the target's management team. It is in fact the target's management that will drive the company's stock market story, but the SPAC sponsors may remain in place, either as directors or to accompany the company, bringing complementary skills. Very often, sponsors include people who themselves have complementary skills. We see someone who has a more entrepreneurial profile than others with more financial profiles, more deal maker profiles, or people with more managerial skills. It is this juxtaposition or synergy of skills that enables us to source deals, to do good due diligence and then to accompany the story.
But with some SPAC sponsors with profiles that are more media than financial (Serena Williams, Jay-Z, Shaquille O'Neal, etc.), are we not reaching the limits of the exercise? with, above all, the SPAC's media profile being bigger than its sponsor.
I find this a particularly negative development of the SPAC and one that gives SPACs a bad image. Don't confuse fashion, the buzz, with this market. The sponsor must bring something to the SPAC. If Serena Williams or whoever wants to set up a SPAC, the question the investor (and before that, the bank taking the mandate) has to ask is: "What is this person bringing to the SPAC?"If he or she is just bringing a name and the ability to federate offers, to attract offers on the basis of the name, I consider that this is a type of fraud. It's fraud, because the investor comes in and puts money on Serena Williams' head, on Jay-Z's head, with the promise that these people are going to make them rich, which is absolutely not the idea behind the SPAC. If this personality, on the contrary, sets up a SPAC, because he or she has the capacity to source deals through his or her network, diverse and varied skills, that other investors would not have the capacity to source, and that, moreover, he or she is surrounded by people who know the financial markets, the world of finance and business, then why not?
My initial instinct would be to be particularly wary of these profiles. The SPAC is a complex financial product and should not be turned into a fad for the sake of publicity or a platform, or extra likes on Instagram, or whatever.
To return to a more positive side, are SPACs a driver of innovation and growth?
Yes, I think they can be, by bringing in capital. Since we're talking about raising funds at the time of SPAC, and often at the time of despacking, because the company that is acquired is very often much larger than the funds raised at the time of SPAC. So, by bringing in funds. Secondly, by bringing in skills. What I was saying earlier about the skills of the management teams, which can finally bring another way of seeing things, that complements the teams.
And it's also a factor of innovation in the world of finance. Somehow, even if the product, as we said earlier, is old, it's constantly evolving. Each SPAC that comes up changes the terms of previous SPACs a little bit and therefore brings innovation to finance. It's something that makes companies themselves question and evolve. I think that, just as liquidity makes the financial world a little more balanced when there is good supply and good demand, when there is money deployed on new investment themes to accompany companies, etc., we can contribute to innovation.
Are SPACs reserved for these innovative companies? Can bricks and mortar, good old-fashioned companies with cash flows, contribute to the SPAC world?
A SPAC, again, is really the receptacle of a listed company. And so, any company that can become a good player on the stock market has the possibility of considering a SPAC. It's just another way to become listed.
I don't have the exact volumes anymore, but I think the figure is 15-20% of tech companies in despacking or SPAC targets. It must be 10% for pharma, so everything else is potentially more traditional. Where SPACs will nevertheless be of greater interest to non-bricks and mortar companies, new economy companies, etc., is in the ability of management teams to do the upstream work for investors and the due diligence.
And it's true that for a bricks and mortar company, a company that makes internal combustion engine vehicles, for example, there are enough comparables in the market for a classic team of investors to form an opinion, etc., and finally, that this object finds a buyer through a classic IPO.
If we're on a totally disruptive model, a completely new way of thinking about the vehicle of tomorrow (I'm thinking beyond electric cars), even if there are investors for that on the stock market, we're looking at a niche. We're in a much more sophisticated market, and this is where the SPAC will potentially help bring investors and management teams together. The SPAC is the facilitator of the meeting between these two markets.
So, it's not surprising that we see a percentage, as I mentioned earlier, that is a bit high on "slightly more complicated" companies, but the product is still quite relevant for bricks and mortar.
So, the SPAC is not yet very well known to the general public and we sometimes hear entrepreneurs say no, I don't want to set up a SPAC because I want a real IPO. Is it slightly shameful to come to the stock market through a SPAC?
No, it is not at all shameful. Both are relevant and the way the question is asked gives the answer. Finally, there are people who say: "I prefer to do it the traditional way", which is another way of saying: "I prefer to go and confront myself very directly, carry the story and do the work of convincing the investors and finally have a process of price discovery by the Stock Exchange", etc. It's a form of human and industrial adventure.
The SPAC is another way. It is more of an M&A process. It is not at all uncommon to see different competing paths in the sale process today, whereas in the past we used to see dual tracks between M&A and IPOs, which could be perfectly simultaneous, or one preceding the other. Today we see dual and even triple tracks with a SPAC track. Firstly, because there are many SPACs which have been raised and are looking to despack. But also, because some entrepreneurs, some managers, don't really know what SPAC is, have an opinion that may not necessarily be transparent, and are happy to come and meet this offer and form their own opinion to finally perhaps carry out an IPO, perhaps implement an M&A process, perhaps set up a SPAC.
So, there's no shame, not at all, quite the contrary, in using SPACs. We talk to a lot of issuers about it. Now, the SPAC is not the right product for everyone. We really need sponsors who bring something to the table. You need a particularly interesting investment case. And so, we, as a bank, when we talk to sponsors who say: "I want to set up a SPAC", we spend a lot of time on the sponsors themselves, understanding their investment case and their acquisition pipeline. Is there really a market for them? So, I think we have to be selective in order to avoid bubble phenomena, to avoid media coverage, celebrification, etc. I think we need to go back to the basics, so that everyone, investors, bankers, sponsors themselves, are selective in the projects they carry out, and then the sellers themselves have a form of selectivity.
When you're a seller, you bring your baby to the stock market, you bring your baby to a buyer, etc. You want it to be carried by people who are not going to drop the business after the acquisition or after the listing. So, you don't just take your business to any SPAC.
The SPAC is as much a fundraising tool for a management team looking for a target as it is for a selective despacking target?
Absolutely. I recommend it to everyone. It's being discussed, but it's a product that I believe in and that I think should continue to do well in Europe. I don't know if we'll catch-up on the US volumes. This is rarely the case, but in any case, I keep on "socialising" it, as they say.
World-wide corporate tax rates have stabilised at around 24%. They are now close to 21% in Europe on average, due to lower corporate tax rates in Eastern Europe; but they are expected to start rising soon with the UK rising from 19% to 21%, before reaching 25% in 2024, unless the new PM decides otherwise.
With Simon Gueguen, lecturer-researcher at CY Cergy Paris University
Financial asset pricing models are built on the relationship between risk and return. This is particularly true of models applied to the equity market. The expected return depends on the exposure of the share to different risk factors: mainly the risk linked to market fluctuations (the CAPM beta), and secondarily the risks linked to specific characteristics of the company (size, book-to-market ratio, etc.). Generally, these models do not take into account the risk associated with carbon emissions.
However, global warming has become a major concern for humanity and the main players in the world of finance committed themselves to participate in the fight against this phenomenon at COP21. In 2013, former US Vice President Al Gore explained that carbon risk should be "incorporated into the valuation of companies' equity and debt".
The article we present this month shows empirically that this risk is indeed incorporated by investors when valuing stocks.
There are three possible explanations for why carbon risk can affect equity returns. The first is the assumption of a carbon risk premium. High-emitting companies are subject to both regulatory risk (increase in the cost of carbon emissions or limitation of emissions in volume) and technological risk (decrease in the price of renewable energy). This naturally results in a higher demand for profitability on the part of investors.
The second explanation is the assumption of market inefficiency. Investors (and financial analysts) would not sufficiently take into account the long-term consequences of carbon emissions in their flow forecasts; as a result, low-emitting companies would tend, all other things being equal, to be undervalued (and therefore more profitable). A recent study, cited by Bolton and Kacperczyk, shows that a portfolio buying low-emission stocks and selling high-emission stocks achieves an abnormally positive return.
Finally, the third possible explanation is the disinvestment assumption. This simply means that investors are shying away from high-emitting companies for ethical reasons. As a result, these companies are undervalued and, similar to the carbon risk premium assumption, the required return on equity is higher for high emitting companies.
The study covers US data from 2005 to 2017. The main observation is the existence of a carbon premium, i.e. a higher profitability for the shares of high-emitting companies, all other things being equal. A one standard deviation increase in direct CO2 emissions results in an increase in profitability (annualised) of between 1.8% and 3.1%. The increase is of the same order of magnitude for indirect emissions (via suppliers).
When we go into the details of the study, one result is quite surprising. The carbon premium is linked to the total level of emissions, not their intensity (relative to the size of the company). In other words, the effect on small polluting companies is very small. One possible reason is that many regulations focus on the total amount of emissions and not on their intensity. As a result, it is mainly large companies that are negatively affected in their valuation when they are CO2emitters.
In addition, Bolton and Kacperczyk seek to identify the source of this lower valuation of corporate emitters. They note that institutional investors only exclude companies from their portfolios (divestment assumption) that emit carbon directly, without taking into account indirect emissions. Above all, this selection only concerns the sectors deemed to be the most polluting (energy, public services, automotive, etc.). Finally, if the divestment assumption is verified, it does not significantly affect returns. In fact, the main source of the link between CO2 emissions and stock returns comes from the existence of a carbon risk premium. In other words, the main reason why investors take CO2 emissions into account in their investment choices in the equity markets is because of the risk associated with these emissions.
 P. Bolton and M. Kacperczyk (2021), "Do investors care about carbon risk?", Journal of Financial Economics, vol. 142-2, pages 517 to 549.
 S.Y. In, K.Y. Park and A. Monk (2019), 'Is being green rewarded in the market? An empirical investigation of decarbonisation and stock returns", Stanford Global Project Center Working Paper.
Yes! Gecina has even done better than that by transforming all its (classic) bonds into green bonds. The fact is that Gecina is a group strongly invested in the ecological transition with a portfolio of real estate assets that are much more ecologically efficient (more than 80% of the portfolio is certified for energy quality) than the average real estate company. Investors were therefore easily convinced (after a specific roadshow) that the funds raised during the bond issues had been used for projects with a strong ecological component.
Technically, Gecina convened the bond investors who were able to vote on the use of proceeds. The use of proceeds was changed from general corporate purposes to financing buildings that meet the ESG objectives described in Gecina's CAN0P-2030 plan. The vote was supported by 92% of investors.
Gecina has thus greened its balance sheet in one fell swoop, allowing ESG funds to invest in these bond issues. It is worth noting that in the days following the transformation, the actuarial rates of return on the bonds fell by more than 0.10% compared to those of competitors.
This process of transforming existing bonds seems to be reserved for groups considered a priori by investors as green. But one could very well imagine the same type of operation for a renewable energy operator, for example.
Regularly on the Vernimmen.com Facebook page we publish comments on financial news that we deem to be of interest, publish a question and its answer or quote of financial interest.
Turbulence in the credit market
The stronger than expected rise in interest rates coupled with fears of a sharp economic slowdown, which could turn into a recession in the coming quarters, has brought the high yield market to a standstill and is blocking the crossover market (ratings between BBB and BB). This is reflected in the cost of protection against the risk of default on these bonds, which has reached 600 bp on the iTraxx crossover index, i.e. almost as much as in April 2020, but far from the record high of winter 2009 (1123 bp).
As a result, the market for large LBOs is at a standstill, and some borrowers for whom the bond market is de facto closed are turning to the banks, provided that the latter are willing to lend and have room on their balance sheets. In this case, the margins are not small. Bad times for the most indebted borrowers.
Banks are making their first big losses on LBOs committed in February that are only now coming out as the M&A process is getting longer and longer. Banks prefer to take their losses now so as not to be saddled with a tainted balance sheet in the future. This is quite healthy.
EDF, a logical evolution
The State will therefore buy out the minority shareholders in EDF's capital to take the energy company off the stock exchange if it succeeds in reaching the threshold of 90% in voting rights and shares, up from 83.8% today.
This evolution seems inescapable and desirable as the great gap between the State, majority shareholder of EDF, and the State which wants to protect the citizens against a too strong rise of the energy prices has become unbearable. Thus, last January the State ordered EDF to sell 20 TWh more from its nuclear power plants to its competitors at a price of 46.2 €/MWh, well below the market price, in order to allow the final consumer to bear only a 4% increase of his/her electricity bill. This resulted in a drop of about €8 billion in its EBITDA (to be compared with €18 billion in 2021). And EDF's share price felt by 20%.
It seems to us that logic would dictate that the buyout offer from the minority shareholders should be calculated with a business plan that neutralises this fait du prince against which EDF's management has lodged an appeal. This will probably be the case since the government has chosen the path of the takeover bid followed by a squeeze out, and not that of a nationalisation, which is more protective of the interests of the minority shareholders since its success is conditional on the agreement of 38% of them (6.2/16.2, to reach 90%). The fairness opinion that will be delivered will be watched closely.
The more financial-minded among you will have noted that for the State, the stock market listing will not have been a bad financial deal, with an IPO at €32, then a sale at €82 and a buyback probably at around €10.
In the meantime, being a shareholder alongside a state is rarely an enviable situation because of its dual role as political power and shareholder, which logically leads to choices that are not always in the company's interest. Hence the value discounts for listed companies with state ownership, as Renault or Eramet can testify, and which do not seem to be compensated for by the elimination of the risk of bankruptcy induced by state ownership.