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Project Hercules

11 September 2019 by jbchevrel

EDF (A3/A-) five-year CDS has been pretty stable, keeping the summer [40bp,50bp] range, despite the stock has been pressured since yesterday on the back of deviation in nuclear components. EDF said 9/10 in a statement that its majority-owned nuclear reactor construction unit Framatome reported a deviation from technical standards in the manufacture of some nuclear-reactor components. It was about both in-service and out-of-service components. Reuters reported the issue could affect c20% of EDF’s French nuclear fleet. Menage (IRSN head) said problems affected mainly EDF reactors whose steam generators had been replaced since 2008, notably its older 900 MW reactors, adding a new welding procedure introduced from 2008 for the production of steam generators had not reheated components evenly and that EDF and ASN now needed to investigate. He also said it was too early to assess if the welding problems could lead to reactor closures or how long the study would take. EDF has 58 nuclear reactors in France, but not all have been supplied by Framatome and EDF’s potentially affected 900MW reactors each have three steam generators (its 1300MW reactors each have four). Some other sources filtered that c20 reactors could be affected. This is as EDF is committed to €45B investment/transition programme to extend the life of existing nuclear plants and close some others, bringing the nuke to 50% of the power mix from current 72%. The positive is that Framatome said initial studies suggest the quality of affected manufactured components is up to standard. The fact that EDF didn’t decide to close any reactor is (hopefully) another positive. But this development is clearly a net negative for EDF and the embedded uncertainty seems to affect more the equity than the single-A credit. Indeed, the stock came down -2.8% lower than 9/9 close, having reversed from the -8.8% dip in yesterday’s early morning. In cash space, the 4 5/8 Sep24s has lost about half a point yesterday and was stable today. The cash/CDS basis remains close to nil.