French oil major Total and UK’s BP have both issued hybrid bonds to protect dividends.
Image: iStock © Oliver Hoffmann
In the light of falling revenues due to the oil price slump, two of Europe’s major oil producers are looking to cheaper borrowing methods to maintain dividend payouts and protect balance sheets.
BP issued €2.5 billion in European bonds and $2.75 billion in U.S bonds last week, benefitting from a cheap deal on borrowing costs in bonds. Investment grade bonds are appealing to investors currently allowing companies to raise equity at a lower cost than this time last year.
In the few days following the bond issue, BP shares rose by 4%.
Total issued on Thursday a €5 billion hybrid bond, which gained huge investor interest – analysts predicted the bond would only be worth €3 billion - and took the share value of Total up at opening Friday by 0.8%.
In Total’s recent quarterly earnings report, the oil major made a promise, which this bond deal will provide for, saying ‘The Board of Directors decided to propose at the Annual Shareholders’ Meeting on May 29 2015, an annual dividend of 2.44 euro per share, an increase of 2.5% compared to 2013.’ With net income (Group share) coming in for 2014 at minus 62% dropping from $11,228 million to $4,244, the need to appeal to investors was absolutely necessary.
MT4 chart: BP
MT4 chart: TOTAL
The hybrid bonds issued are defined as Hybrid securities, a broad group of securities that combine the elements of the two broader groups of securities, debt and equity. Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date, at which point the holder has a number of options including converting the securities into the underlying share. Therefore, unlike a share of stock (equity) the holder has a 'known' cash flow, and, unlike a fixed interest security (debt) there is an option to convert to the underlying equity.
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