22. Loans and financial liabilities

The following table details loans and financial liabilities recognised in the separate financial statements of Terna at 31 December 2010:

  Carrying amount  
In millions of euros 31 Dec. 2010 31 Dec. 2009 Change
Bonds 2,728.2 2,643.5 84.7
Bank loans 2,419.3 1,555.7 863.6
Long-term loans 5,147.5 4,199.2 948.3
CFH derivatives 47.1 82.6 -35.5
Non-current financial liabilities 47.1 82.6 -35.5
Short-term loans 73.1 42.7 30.4
Current portion of long-term loans 59.7 59.7 0.0
Short-term loans and current portion of long-term loans 132.8 102.4 30.4
Total 5,327.4 4,384.2 943.2

Gross debt for the year increased with respect to the previous year by € 943.2 million to € 5,327.4 million.
The increase in the carrying amounts of bonds (€ 84.7 million) comprises the change in the fair value of the hedged risk, € 75.9 million, and capitalisation of the inflation for the period net of the amortised-cost effect, € 8.8 million. The change linked to the hedging of interest-rate risk comprises € 17.4 million in relation to the inflation-linked bonds, € 39.3 million to the 2014-2024 bonds and € 19.2 million to the private placement, and offsets the increase in the fair value of the  derivatives recognised as financial assets, € 77.1 million.
The fair value of the bonds is measured by discounting the projected cash flows along a yield curve of interest rate at the reporting date. The latest official prices for the bonds listed on the Luxembourg Stock Exchange are detailed below:

  • bond maturing 2024, 2010 price: 104.23; 2009 price: 102.29;
  • bond maturing 2014, 2010 price: 105.70; 2009 price: 104.34;
  • bond maturing 2023, 2010 price: 96.57; 2009 price: 102.60;
  • bond maturing 2019, 2010 price: 105.00; 2009 price: 103.56.

Source: Reuters

Consequently, compared with the total carrying amount of € 2,782.2 (€ 2,643.5 million at 31 December 2009), the market value is € 2,609.7 (€ 2,600.3 at 31 December 2009). As regards debt originally bearing floating rates, the increase of € 894.0 million is due to:

  • a € 59.7 million reduction in European Investment Bank loans and other financing following repayments made on outstanding loans;
  • the collection in March of an EIB loan totalling € 73 million;
  • the collection in November of an EIB loan totalling € 300 million;
  • an increase in other loans of € 550 million as a result of drawing on the 2006 revolving credit facility;
  • the establishment of a short-term loan totalling € 50 million;
  • decrease in the use of overdraft facilities in the amount of € 16.9 million.

Movements include the issue, on 25 March 2010, of the previously cited EIB financing of € 73 million which has a term of 20 years and will be repaid in semi-annual instalments as of the fifth year at 6-month Euribor uplifted by 40 basis points. These include the issue, on 24 November 2010, of the previously cited EIB financing of € 300 million which has a term of 20 years and will be repaid in semi-annual instalments as of the fifth year at 6-month Euribor uplifted by 39 basis points.

Long-term loans
The following table reports the carrying amounts of long-term debt and the repayment plan as of 31 December 10, broken down by loan type, including amounts falling due within one year and average interest rate at year-end:

In millions of euros Maturity 31 Dec.2009 31 Dec.2010 Due
within
one year
Due
beyond
one year
2012 2013 2014 2015 After   Average
interest rate
as of
31 Dec. 2009
Bonds 10y e 20y 2014-2024 1,479.5 1,518.8 0.0 1,518.8 0.0 0.0 636.5 0.0 882.3 4.62%
Bond Inflation Linked 2023 563.5 589.7 0.0 589.7 0.0 0.0 0.0 0.0 589.7 4.42%
Private Plaecement 2019 600.5 619.7 0.0 619.7 0.0 0.0 0.0 0.0 619.7 4.88%
Total fixed rate   2,643.5 2,728.2 0.0 2,728.2 0.0 0.0 636.5 0.0 2,091.7  
EIB 2014-2030 766.9 1,080.1 59.7 1,020.4 59.7 69.4 79.2 76.9 735.2 1.03%
Club Deal 2015 648.5 648.9 0.0 648.9 0.0 0.0 0.0 648.9 0.0 1.31%
RCF 2006 2013 200.0 750.0 0.0 750.0 0.0 750.0 0.0 0.0 0.0 1.04%
Total floating rate   1,615.4 2,479.0 59.7 2,419.3 59.7 819.4 79.2 725.8 735.2  
Total   4,258.9 5207.2 59.7 5,147.5 59.7 819.4 715.7 725.8 2,826.9  

The repayment of the nominal amount of the 2014, 2024, and 2019 bonds, equal to € 2,000.0 million, will entail payment of € 600.0 million on 28 October 2014, € 800.0 million on 28 October 2024 and € 600 million on 3 October 2019; the inflation-linked bonds will be repaid at maturity, on 15 September 2023, with the nominal value adjusted to reflect inflation.

All other financial debt items are stated at their nominal value along with the related repayment plan.
The total loans at 31 December 2010 of Terna amount to € 5,207.2 million, including loans of € 5,147.5 million due after one year and € 2,826.9 million due after the fifth year. The table shows the average interest rate for each type of financial liability. Below we also comment on the Group’s hedging operations against interest rate fluctuations. As regards the 2014-2024 bonds, with an average coupon of 4.62%, if FVH hedging operations are taken into account, the average interest rate is equal to 1.42%.

For the inflation-linked bonds – and taking hedges into account – and assuming a 1.68% inflation rate, the average interest rate paid in the year was 1.03%.
In line with financial risk management policies, the fixed-rate private placement was synthetically transformed to a floating rate security by means of derivative contracts with the same maturity. Consequently, the average interest rate paid in the year was 2.31%.

With regard to floating rate loans covered by fluctuations in interest rates – and taking into account the effect of derivative financial instruments booked as cash flow hedges – an average rate of 4.46% is reported for EIB financing while for the Club Deal financing totalling € 650 million the average rate was 4.70% and for the RCF financing the average rate was 2.17%.

The following table reports changes in long-term debt for the year:

Type of loan In millions of euros Nominal
debt at
31 Dec. 2009
Carrying
amount at
31 Dec. 2009
Repayment
and
capitalisation
New
issues
Delta fair
value
31 Dec. 2009
31 Dec.2010
Change in
carrying
amount
Nominal
debt at
31 Dec.2010
Carrying
amount at 31 Dec.2010
Listed fixed-rate bonds 1,400.0 1,479.5 0.0 0.0 39.3 39.3 1,400.0 1,518.8
Listed IL bond 521.0 563.5 8.8 0.0 17.4 26.2 529.8 589.7
Private Placement 600.0 600.5 0.0 0.0 19.2 19.2 600.0 619.7
Total bonds 2,521.0 2,643.5 8.8 0.0 75.9 84.7 2,529.8 2,728.2
Bank loans 1,616.8 1,615.4 (59.7) 923.0 0.3 863.6 2,480.1 2,479.0
Total Bank loans 1,616.8 1,615.4 (59.7) 923.0 0.3 863.6 2,480.1 2,479.0
Total financial debt 4,137.8 4,258.9 (50.9) 923.0 76.2 948.3 5,009.9 5,207.2

As compared with 31 December 2009, long-term debt shows an overall increase of € 948.3 million, for € 550 million drawn from the Revolving Credit Facility, for € 373 million in the form of two new loans from the EIB, € 8.8 million on the capitalisation of inflation for the period in relation to the IL bond, and € 75.9 million on the increase in the fair value of the bonds due to the decline in interest rates, net of € 59.7 million in instalment payments on the EIB loans and for € 0.3 million to the measurement of the Club Deal loan at amortised cost.

As of 31 December 2010, Terna has unused lines of credit exceeding € 1,697.6 million, of which more than € 697.6 million in short-term credit lines and € 1,000.0 million in medium-term credit lines.

Non-current financial liabilities
The table below reports the amount and changes in non-current financial liabilities with respect to value at the end of 2009:

In millions of euros 31 Dec. 2010 31 Dec. 2009 Change
CFH derivatives 47.1 82.6 -35.5
Total 47.1 82.6 -35.5

“Non-current financial liabilities” include the fair value of cash flow hedges.
Fair value was measured by discounting the expected cash flows using the market yield curve at the reporting date. The change with respect to 31 December 2009 was equal to -€ 35.5 million.

Short-term loans
Short-term loans, equal to € 73.1 million, consist of drawings on overdraft facilities for € 23.1 million and short-term loans for € 50.0 million.

Current financial liabilities
Current financial liabilities, which are generated by the net financial expense accrued on financial instruments but not yet settled, decreased on the previous year by € 1.3 million; this was primarily due to current financial liabilities for private placement (-€ 7.4 million) and the relative derivatives (€ 2.9 million) which were partially compensated by the greater amount of loans in force in 2010 (€ 3.2 million).

The following table details deferred liabilities on the basis of the financial liabilities to which they relate:

In millions of euros 31 Dec.2010 31 Dec.2009 Change
Deferred liabilities on:      
Derivatives:      
- hedging -6.5 -9.4 2.9
Bond:      
- IL 4.3 4.3 0.0
- Private Placement 7.2 14.6 -7.4
- 10 years 4.5 4.5 0.0
- 20 years 7.0 7.0 0.0
Total 23.0 30.4 -7.4
Loans 7.7 4.5 3.2
Total 24.2 25.5 -1.3

Net financial position
Pursuant to the CONSOB Communication of 28 July 2006, and in conformity with the CESR Recommendation of 10 February 2005 for the “Consistent implementation of the European Commission regulation on prospectuses”, the net financial position of the Company is as follows:

  Carrying amount
In millions of euros 31 Dec.2010
A, Cash 0.1
B, Other liquidity 150.0
C, TELAT loan 500.0
D, Net current a/c position of intercompany treasury 18.6
E, Cash and cash equivalents (A) + (B) + (C) + (D) 668.7
F, Current portion of long-term debt 59.7
G, Short-term loans 73.1
H, Current financial debt (F)+ (G) 132.8
I, Net current financial debt (H) - (E) -535.9
J, Non-current bank debt 2,419.3
K, Bonds 2,728.2
L, Derivative financial instruments in portfolio -153.2
M, Net non-current financial debt(J)+ (K)+ (L) 4,994.3
N, Net financial debt (I) + (M) 4,458.4

For more detail on the composition of the items in this table, please see notes 14 and 18, as well as the information presented here in note 22.
Certain long-term loans obtained by Terna S.p.A. are subject to covenants normally applying in international practice.
The principal covenants relate to:

  • the Company’s bonds, comprising two issues of € 600 million and € 800 million in 2004, and two issues under the € 4,000,000,000 Euro Medium-Term Notes Programme, one of € 500 million in 2007 and one, in the form of a private placement, of € 600 million in 2009;
  • bank debt, consisting of two revolving lines of credit of € 500 and € 750 million, a “Club Deal” syndicated loan of € 650 million, and a loan from Cassa Depositi e Prestiti (CDP) of € 500 million that draws on EIB funds;
  • loans from the European Investment Bank (EIB) totalling € 1,298 million.


None of the covenants have been triggered to date.
The principal covenants relating to the issue of bonds and the € 4 billion EMTN programme are summarised below:

  • “negative pledge” clauses, under which the Issuer or “significant subsidiaries” (consolidated companies whose total assets represent at least 10% of total consolidated assets and, solely for the EMTN programme, whose registered offices are in an OECD country) may not establish or maintain mortgages, liens or other encumbrances on all or part of its assets in order to secure listed bonds, unless these guarantees are extended on the same basis to the bonds concerned. A number of exceptions apply (guarantees required by law, guarantees in place prior to the date of the loan, guarantees on new assets that only secure the debt arranged to acquire them etc.), in relation to which the Company is not bound by the above pledges;
  • “pari passu” clauses under which the securities constitute a direct, unconditional and unsecured obligation of the issuer and are issued without preferential rights among them and have at least the same seniority as other present and future unsecured and unsubordinated borrowing of the issuer;
  • “default event” clauses, under which certain events (e.g. failure to pay, initiation of liquidation proceedings, breach of contractual obligations etc.) are considered to represent potential default; in addition, under the “cross default” clauses, the occurrence of a default event in respect of any financial liability (above a threshold level) issued by the Issuer also constitutes a default in respect of the loan concerned, which becomes immediately repayable;
  • periodic or occasional reporting requirements on the occurrence of specified events;
  • voluntary early redemption clauses, under which the Issuer may redeem at any time all outstanding bonds at par, in the event of new tax requirements.


The principal covenants for the revolving lines of credit, the “Club Deal” syndicated loan and the € 500 million loan from CDP are summarised below:

  • “negative pledge” clauses, under which the Company and each significant subsidiary (consolidated companies whose total assets represent at least 10% of total consolidated assets) agree not to establish new guarantees securing any type of financial liability, with the exception of permitted guarantees (guarantees required by law, guarantees in place prior to the date of the loan, guarantees on new assets that only secure the debt arranged to acquire them, guarantees given to governmental or international entities, including the EIB, guarantees on borrowing whose amount does not exceed 10% of total assets etc.);
  • “pari passu” clauses under which the payment undertakings of the borrower in respect of loans are not subordinate to any obligation in respect of other unsecured and unsubordinated creditors, except in the case of statutory preferential rights;
  • “event of default” clauses linked to the occurrence of specified events (such as, for example: failure to pay; false declarations, insolvency, termination of activities, seriously prejudicial events, breach of contractual obligations, including the equality of the conditions applied by lenders etc.) are considered to represent potential default; in addition, under the “cross default” clauses, the occurrence of a default event in respect of any financial liability (above a threshold level) also constitutes a default in respect of the loan concerned, which becomes immediately repayable;
  • periodic or occasional reporting requirements on the occurrence of specified events;
  • compulsory early redemption clauses under which the Company is required to repay the loan early if its long-term credit rating is reduced below investment grade (BBB-) by a majority of the rating agencies that monitor the Company, if the Company ceases to be monitored by one or more rating agencies.

The main covenants governing the EIB loans can be summarised as follows:

  • “negative pledge” clauses, under which if the Company establishes, agrees, provides or decides to maintain restrictions in favour, whether directly or indirectly, of third parties (such as unsecured or secured guarantees, liens, encumbrances, charges or other rights), it must also extend equivalent guarantees to the Bank, upon simple request from the latter, except in the case of restrictions granted in relation to borrowing below a threshold level;
  • clauses requiring the delivery of additional guarantees to the Bank in the event of a reduction in the Company's rating:
  • clauses requiring the pledging of additional guarantees to the EIB in the event of a reduction in the Company’s rating: Aby
  • Standard & Poor’s; or A3 by Moody’s; or A- by Fitch), the Bank is entitled to require the Company to provide it with
  • additional guarantees that are considered satisfactory at the sole discretion of the Bank, exercised on a reasonable basis.
  • “pari passu” clauses, under which, for the entire period of the loans, the Company will ensure that the payment obligations have the same seniority as those relating to all other unsecured and unsubordinated creditors.
  • periodic or occasional reporting requirements on the occurrence of specified events concerning both the projects being financed and the Company itself;
  • clauses regarding “termination”/“early repayment”/“withdrawal” of the contract: on which basis, where certain events occur (such as, for example: failure to pay, serious inaccuracies in documentation presented, insolvency, events resulting in negative consequences on the financial commitments made by the company, special administration, liquidation, etc.) constitutes default, triggering immediate repayment; in addition, where the Company is required upon default to discharge in advance any other financial obligation in respect of loans, credit facilities, bank advances, discounting, the issue or subscription of any form of bond or security, such default shall also constitute default on the loan in question, triggering immediate repayment.