Last week credit rating agency Standard & Poor’s (S&P) upgraded its rating outlook on Envestra Limited (Envestra) to positive from stable. The key driver of the change in outlook has been the continued improvement in key credit metrics for the company and the expectation that this improvement will continue in 2013. The confirmation of this improvement should result in a rating upgrade. The move by S&P meets our earlier calls as we previously flagged a potential rating upgrade (first highlighted in September 2011 article).
The final overhang for the agency, before they follow through the positive outlook with a rating upgrade, will be the release of the Victorian regulators’ decision on gas distribution revenues for the next regulatory period early next year.
Envestra
Envestra is a gas distribution company with its business spread across multiple regulatory jurisdictions which provides diversification of its key risk – regulatory risk. With positive outcomes from regulatory decisions in Queensland and South Australia this year, the outstanding Victorian decision represents the final piece in the regulatory puzzle for the company.
Since the start of the GFC, Envestra has gradually improved its key credit metrics, and in particular the Debt-to-Regulated Asset Base metric, which we see as the key driver of financial performance and the company’s ability to meet is debt obligations. This steady improvement has not been reflected in the pricing of Envestra’s bonds and as such their issues continue to present an attractive buying opportunity for investors.
Envestra has continued to post impressive results in recent years as we noted in our latest research on the company (retail and wholesale). Listed on the ASX, Envestra is run by a team of experienced infrastructure specialists and management have shown both a commitment, and the ability, to improve their financial position in recent years.
We consider the best value in the Envestra capital structure in its inflation linked bonds (ILBs) maturing in 2025. The ILBs are currently providing investors an inflation linked return of CPI +4.15% - providing investors the chance to lock in strong returns from an investment grade infrastructure asset with pricing not yet reflecting the likely rating upgrade. Envestra remains one of our preferred infrastructure investments and offers the opportunity to diversify portfolios with a solid infrastructure name.
Envestra 2025 ILBs are available to retail and wholesale investors from $50,000 notional face value. For more information please call your local dealer.