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As global energy demand rises, the world’s energy mix also changes. Fossil fuels still account for almost 85% of our energy consumption – but not for long. As a report from ING suggests, there will be a significant shift in the type of energy we use by 2040 where renewables will dominate the market.
We can already witness this change in the energy sector, where oil & gas companies are becoming more environment-friendly in their processes, innovative green-energy startups are performing strikingly well, power industries are aiming towards a carbon-neutral strategy and oil companies are switching to extraction methods that result in lower CO2 emissions.
New climate-conscious investments are being adopted where clean electricity capacities and battery recycling firms have become the “hot” market. Opportunities for investors get increasingly flexible and valuable, especially with a booming demand from the EV industry to develop recycling infrastructures, specifically in Northern America and Europe.
Needless to say, the coming decades will see a significant industrywide upscale in the energy sector with a constant rise in global trends toward sustainability.
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The business model of the German energy group Encavis is based on the acquisition and operation of solar and wind power plants in selected European countries. To finance this high-growth business, Encavis has issued a hybrid bond (in two tranches) in recent years, which gives its investors the right to convert the bond into shares of the company at any time. It should be mentioned here that the share price has been well above the conversion price of around € 7.50 for around two years, which equates to a “risk-free profit” for investors (upon conversion). For institutional investors in hybrid bonds, however, the 5.25% coupon appears to be much more attractive.
At the beginning of October 2021, the issuer Encavis itself will now have the option of converting the bond into shares. Since the chart is showing signs of bottoming out and the current price of around € 15 is already well above the conversion price of around € 7.50, the mandatory conversion of the hybrid bond in October appears to be legally possible – should the share price remain in double digits until then. With the mandatory conversion, Encavis could replace the high 5.25% coupon of the hybrid bond and refinance more cheaply.
With a complete conversion of all shares, the total number of all shares could then increase by around + 15% and the investors could realize their “risk-free profit” by the immediate sale of the new shares. A price setback would be the result. Many institutional investors in hybrid bonds are currently holding short positions in Encavis shares for hedging reasons, which should also underpin the consideration of immediate profit realization in the event of mandatory conversion into shares. For this reason, a significant (double-digit) price setback in the Encavis share in October 2021 would be quite possible.
– Markus Polz, Asset Management at CM-Equity AG
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