Converting power into opportunity
First-mover advantage coupled with positive supply dynamics
Positive supply dynamics, coupled with PPL’s first-mover advantage allowed the company to set preferable pricing and terms.
Delivering
value creation
RBC Capital Markets acted as joint bookrunner to PPL Capital Funding, a wholly owned subsidiary of PPL Corporation (NYSE: PPL), on the first convertible bond issuance from a utility in over a decade, paving the way for eight other utilities companies to issue convertible bonds in 2023.
As a U.S. energy company focused on providing electricity and natural gas safely, PPL’s utility capabilities directly tackle today’s energy challenges by constructing intelligent, robust, and adaptable power grids while promoting sustainable energy solutions. With 3.5 million customers served in the U.S., and maintaining more than 90,000 miles of electric and gas lines, PPL continues to lead in the energy sector.¹
This transaction priced as a $900 million offering of 2.875% exchangeable senior notes in a five-year private placement targeting qualified institutional buyers.
This strategic move provided PPL with a lower-cost alternative to straight debt and set a cost benchmark for other utilities in the market. The sale of notes resulted in $882 million in net proceeds to PPL which the company used to repay short-term debt and for general corporate purposes.2
Accelerating
strategic support
In 2022, 10-year U.S. Treasury (UST) yields increased significantly, going from 1.63% to 3.87%. RBC Capital Markets recognized that higher interest rates would result in increased financing costs and reduced earnings for PPL which could put pressure on PPL’s share price. RBC helped PPL evaluate financing alternatives to maximize interest expense savings.
Convertible bonds emerged as a strategic option for capital needs, which allowed PPL to achieve their financing goals while managing interest costs. Despite some shareholder hesitation around the structure, factors such as positive supply dynamics, market price action, and the “higher for longer” theme reinforced the case for convertible bonds.3
RBC assisted PPL by acting as joint bookrunner on this convertible bond transaction, providing valuable access to funding sources that aligned with PPL’s capital raising goals, while also helping to mitigate risk and ensure stability and successful placement execution.
PPL timed the convertible bond issuance to coincide with reporting season, launching and pricing the deal the evening after delivering year-end earnings results. PPL’s first-mover advantage combined with the scarcity value for an Investment Grade (IG) rated convertible bond enabled the company to price the transaction at a 2.875% coupon and 22.5% conversion premium. RBC estimated the annual interest rate on the convertible bond was 250bps lower than where the equivalent in straight debt would have been at the time of the transaction.
"We started thinking about a convertible bond as a funding tool to mitigate interest expense."4
Tadd Henninger
Senior Vice President - Finance and Treasurer, PPL Coporation
Aggressively priced coupon with upside for investors
PPL strategically priced its convertible bond to maximize investor interest and provide an attractive opportunity for investors to benefit from potential stock price appreciation when converting the bond into shares at the conversion price.
Innovative, award winning structure
The transaction was selected as IFR's structured equity deal of 2023, supporting PPL's commitment to grow earnings per share by 6%-8% annually through 2025 and contributes to financing its estimated $12 billion capital expenditure plan through 2026.
Executing
for success
By bringing together RBC Capital Markets’ strategic insights and equity capital markets capabilities, PPL was able to capitalize on favorable market conditions, position itself as a leader, and price its convertible bond aggressively while still attracting high-quality investors. In a traditionally risk-averse industry, PPL managed to negotiate more favorable terms than its subsequent utility peers.
Sources
All transaction details and forward looking statements sourced from the following press announcement.
¹ https://filecache.investorroom.com/mr5ir_pplweb2/1107/2023_PPL_Annual_Report.pdf
2 After deducting the initial purchasers' discount but before deducting estimated offering expenses payable by PPL Capital Funding (assuming no exercise of the initial purchasers' option to purchase additional notes).
3 https://www.rbcbluebay.com/en/institutional/what-we-think/insights/ideas-in-action-higher-rates-to-support-convertible-bonds-issuance/
4 https://www.ifre.com/story/4294838/americas-structured-equity-issue-ppls-us1bn-five-year-convertible-bond-ns56fdd3vy