24 July 2020 by jbchevrel
Centrica PLC (CNALN) is an energy and services company, whose segments include Consumer (energy supply, in-home servicing and home solutions), Business (Energy Supply, Energy Optimization and Business Services & Solutions), and Exploration & Production (of both oil and gas). CNALN is focus on the UK, Ireland and North America. Today CNALN 5y CDS tightened aggressively, by -26bp to 87bp, after the news came that CNALN will sell its US business to NRG Energy for $3.6B in cash. This move aims to cut debt, thus strengthening balance sheet. This asset sale, coupled with the fact that the company didn’t declare an interim dividend, reduces financial risk drastically. Furthermore, CEO O’Shea said the strategy is to become a ‘simpler, leaner business’. CNALN is therefore expected to keep re-focusing on their historic core markets (UK & Ireland). Furthermore, CEO O’Shea said they would also work to reduce earnings volatility. Already pre-COVID, as a utility, CNALN had seen stable revenues over the period 2015-19, around £27B. But CNALN was already suffering from relatively volatile Operating Income, ranging from +£2.5B to -£0.9B over that same period. CEO’s commitment to reduce earnings volatility is another positive for credit, as that heralds a reduced business risk going forward. CNALN has been challenged by the COVID crisis and the 5y CDS has reached 200bp in both April and May. Pre-COVID, the CDS was 75bp (2/11 close). Lower financial risk, lower business risk going forward and a supportive macro context explain a reversal just 12bp above pre-COVID levels, at today’s close.