In the publication attached we discuss our detailed forward credit views for developed market (EU and US) Utilities and recommend trade ideas across seniors, perps, and synthetic (CDS).
Recommendation Overview:
EU Utilities
- EDP: Overweight seniors following sound 1H23 results supported by better hydro and normalised supply conditions in Iberia.
- ENEL: Marketweight seniors, given hurdles and maturity should ensure attractive NIPs
- RWE: Overweight, expect further compression vs other national champions, preference on the 30s
- ENGIE: Overweight, really refinancing in 2023, strong underperformance and wide valuations, we prefer the belly of the curve
- Iberdrola: Market weight, despite tight valuations, credit quality should perform in widening scenario
US Utilities
- NEE: Underweight HoldCo, with a selective buy on OpCo 4.8 2033s. Spreads tights relative to peers, heavy HoldCo 1H24 issuance needs.
- SO: Marketweight, with a selective buy on HoldCo SO 5.7 2034s. Spreads are tight vs peers, but positive HoldCo technicals and deleveraging can buoy spreads through 2024 and 2025.
- SRE: Overweight, most value in Holdco SRE 3.25 2027s, SRE 5.5 2033s. We see value in a more supportive regulatory environment, and SRE has light issuance needs and strong credit fundamentals.
- AGR: Underweight, avoid exposure until 30bps back of SRE (currently 15bps). Offshore wind ambitions and weak credit metrics for BBB/Baa2 ratings are driving our view, PNW catalyst may weaken 2024 technicals.
- PCG: Overweight, Buy PCG 6.7 2053s and Sell 5Y CDS. Significant spread pickup vs peers, CPUC rate case overhang is now removed, credit metrics are strong for BBB-/Baa3 ratings and wildfire risks have 'cooled' after system hardening efforts.