Western Europe
Best sovereign issuer:
Italy
Best supranational borrower:
European Investment Bank
When you are a supranational hitting the market frequently and in large volume, it is difficult to be consistently successful. For many in the market, the European Investment Bank is the one that has done the best job of this in the past 12 months.
With overall funding requirements of e47 billion in 2004, the EIB can’t afford to get it wrong too often. “They do have large borrowing requirements, so they need to ensure that each deal is received well and in that the EIB have been very successful,” says Mark Wheatcroft, executive director, fixed-income syndicate, at UBS. “They know that investors need a range of maturities and currencies to trade and they are very vigilant in listening to the banks, monitoring the market and are realistic about the pricing of their bonds.”
But the EIB is also sufficiently nimble to respond quickly to opportunities that open up in the market, which gives it at an advantage over its peer group, particularly this year when volatility has meant the market has kept opening and then closing again.
Ten-year reopener
A good example is its $1.5 billion deal this April, which was the first 10-year global dollar benchmark from any issuer this year, with bookrunners UBS, JPMorgan and Morgan Stanley. The deal opened up the dormant sector, allowing other issuers to follow. The EIB had done another immensely successful 10-year dollar global the previous June but the 10-year maturity had been closed to sovereign and supranationals for months, with investors unwilling to buy into long maturities with so much interest rate uncertainty.
However the EIB pulled it off. “The EIB carefully monitored the market and kept talking to banks and as soon as it saw 10-year yields rising enough to create sufficient investor demand for the maturity in dollars, it was quick to act,” says Wheatcroft.
Nevertheless, a bit of a risk had to be taken with the pricing. Its 2013 dollar deal was trading at dollar Libor minus 45bp. It was impossible to bring a new issue there, so the EIB accepted that it would have to pay a significant premium and priced at dollar Libor minus 23bp.
Pierre Blandin, head of public sector origination at Dresdner Kleinwort Wasserstein, agrees that the EIB is pragmatic when pricing and adept at discovering where the greatest pockets of investor demand lie at any one time. “They have brought the right products at the right time and, consequently, built very strong books.”
Dresdner Kleinwort Wasserstein was one of the bookrunners alongside Goldman Sachs and SG on the EIB’s first 2004 issue from its EARN European benchmark programme in March, a e5 billion October 2007 bond, which attracted nearly e7 billion of demand. The EIB did not price this flat to its existing curve but it was a concession it was prepared to pay in order that the market could absorb such a big deal.
“Transactions this large require a significant amount of work on the EIB’s side. It took a thorough analysis of the market to understand what maturity was best and at the beginning of the year, demand was relatively well spread across the curve, but there were very few transactions at the short end,” says Blandin. In the end, the e7 billion of demand came from a wide variety of buyers, from central banks to retail investors.
Outside the euro and dollar markets where the EIB issues most of its benchmarks, there have been other highlights. It is the largest non-sovereign issuer in the currencies of the 10 new entrants to the EU and added two more of these to the list this year, paving the way for other supranationals to come to these markets.
In March 2004, it brought its debut bond in Maltese lira through Bank of Valletta, raising the equivalent of e23.4 million, becoming the first triple-A borrower to do so, and in April, it made its debut in Slovenian tolars, with a e17 million equivalent bond lead managed by Deutsche Bank. The 10-year deal is the longest dated tolar issue in the international market.
Best high-grade corporate borrowers:
British American Tobacco
British American Tobacco had not done any benchmark issues following its e1.7 billion 2009 deal in February 1999 until it came back to the market last June. Living under a dark cloud of US tobacco litigation and facing a lot of secondary market spread volatility, in order to return to the market, refinance its existing debt and finance a recent acquisition, it was going to have to pick a time when the litigation risk was looking more positive and then update both euro and sterling investors on its story. To manage that, and subsequently issue over e4 billion of debt in euro and sterling and in fixed and floating-rate notes in the space of nine months with consistent success was no small feat.
It wasn’t as if the past 12 months have been a quiet time for the company either. It has had to contend with the continually changing litigation environment, its announcement of a large-scale merger between RJ Reynolds and its US tobacco business, Brown and Williamson and the changes this presented to its credit story, and its on and off involvement in the auction of state-owned Turkish cigarette company Tekel. “They have done this during a very busy and challenging time for the tobacco industry,” says Brian Lazell, head of European corporate debt capital markets at BNP Paribas in London. “Spreads in the sector have continued to be volatile yet they have to continue to print successful deals and get the timing right.”
Not only did BAT have to re-establish contact with euro and sterling investors following a longish absence from the market; it also had to diligently roadshow every deal, explaining how its credit story had changed in the past 12 months. “Our stance has always been that we would undertake roadshows in support of new issuance because ours is a complex credit story,” says David Swann, group treasurer of BAT. “We want to keep investors educated and informed about what the risks are and we do like to keep in contact with them even when we are not issuing.” BAT issued its June euro and sterling deal at a time when the company could capitalize on the news of tobacco litigation cases being overturned in the US. Before that, though, it had done a lot of groundwork sounding out the market. “They presented at Citigroup’s global borrowers conference in March 2003 to start to make sure they were updating investors on the BAT story, and used similar opportunities with other banks’ conferences as well. It was also a chance to hear what investors were saying so that they knew what they had to do to successfully come back to the market,” says Myles McBride, vice-president in European debt capital markets at Citigroup in London.
Before coming back to the market, BAT went on an extensive two-team five-day roadshow, taking in about 140 investors in London, Paris, Milan, Helsinki, Munich, the Netherlands and Zurich. While they were looking for investor support for a 10-year euro deal, bookrunners Citigroup, BNP Paribas and HSBC also found strong demand for a sterling tranche. BAT therefore ended up launching e1 billion 10-year and £350 million ($626 million) 10-year fixed rate deals simultaneously, refinancing the e1.5 billion in debt it had maturing in 2004 in one hit.
An appealing story
Despite coming from a sector plagued by volatility and litigation risk and launching at virtually the same time as General Motors’ $17.6 billion equivalent global deal, this ambitious deal was priced in line with guidance. “GM’s jumbo deal was announced on the last day of the London roadshow in June, putting pressure on corporate spreads across all sectors, but the fact that BAT’s deal didn’t have to be delayed and thoughts on pricing didn’t change showed that BAT was an appealing credit for investors,” says McBride.
In July, BAT issued a e300 million two-year floating-rate note for its Netherlands subsidiary and followed that in September with a e1 billion floating-rate note using Barclays Capital, SG and Dresdner Kleinwort Wasserstein, which turned out to be the largest FRN in euros to date from the tobacco sector.
The 16-year £500 million issue in December was still more impressive. The fixed-rate bond, with JPMorgan, HSBC and RBS as bookrunners, was the longest-dated sterling deal in the tobacco sector and priced 40bp tighter than its previous sterling deal just the previous June. Once again, the company went on a full-scale roadshow as it wanted to catch up with all the sterling accounts. This was also the first deal since the merger has been announced and the company had withdrawn from the Tekel auction, so the company had to explain these issues, its future acquisition plans, the improved litigation environment and its desire to maintain its current credit rating in the long term, despite its acquisition ambitions. In the end, investors saw these as positives and the merger as a way of limiting BAT’s exposure to US litigation.
Most recently, in March 2004, BAT issued a e1 billion seven-year fixed-rate deal with ABN Amro, CSFB and Deutsche Bank as bookrunners. “Seven years in euros was a natural fit in to their maturity curve, which they have now filled in with all these issues,” says McBride. By this stage, BAT could have got away without holding another roadshow for European investors but it went on one anyway and was rewarded with not having to offer a new-issue premium.
BAT’s bookrunners say the fact that all of the company’s deals of the past 12 months have been priced in line with implied fair-value points from its existing maturity curve is a result of diligent marketing work. It was also very good timing. Just a few weeks ago, the news that the Florida Supreme Court was to review the outcome of the Engel class action lawsuit, which had found for the tobacco company defendants, sent BAT spreads immediately 30bp wider. That shows how quickly the window for new issues in this volatile sector can open and close.
Best Financial sector borrower:
HBOS
The fact that HBOS has won this award for the second year running shows exactly how dominant it is in the financial sector. The UK banking group’s most memorable achievement of the past 12 months was its inaugural e3 billion covered bond last July, brought by Citigroup, Goldman Sachs and Dresdner Kleinwort Wasserstein, the first from a UK issuer.
Tony Main, HBOS’s head of liquidity and funding, who recently retired, noted at CSFB’s credit conference last December that this was a welcome additional source of long-term, triple-A funding alongside HBOS’s securitization programme, Permanent Financing. “The market is beginning to question how much volatility in securitization there will be – it will be interesting to see the balance of securitization and covered bonds in the future,” he said.
What it has done since then is in some ways even more impressive. In the space of a few months it has gone from pioneering a new market of UK issuers to creating a credit curve for itself in the asset class with two subsequent covered bond issues.
In the past 12 months, HBOS has achieved a number of other firsts in the market. In June last year, it did the first ever subordinated public bond to be launched in the Euroyen market, a 10-year lower tier 2 issue led by Daiwa Securities SMBC and UBS.
It has also established important landmarks in its securitization programme, part of its strategy this year to term out short-term debt. In October last year, it hired two securitization bankers from ING to lead a new capital markets securitization division to enable the bank to structure its own deals and look at what other assets on the balance sheet other than its mortgage book could be securitized. In March it issued Europe’s largest asset-backed transaction and the world’s fifth-largest public bond of any kind with a £6.1 billion ($11.1 billion) mortgage bond through Citigroup, Morgan Stanley and UBS, priced extremely tightly without even the need for a roadshow.
Yet despite its ground-breaking work in the asset-backed and covered bond arena in the past 12 months, HBOS is also committed to doing regular vanilla issues in euros and dollars as well as opportunistically tapping the sterling, Canadian dollar, Swiss franc and yen markets. It did its debut Canadian dollar transaction in October last year, issuing C$300 million (US$220 million) in a two-tranche offering led by Royal Bank of Canada.
Richard Shrimpton, head of capital markets funding at HBOS, thinks that the fact it has raised around $60 billion in the market over the last 12 months has been most noteworthy of all. “The real achievement for us has been to obtain the volume of funding that we did in 2003 without affecting the performance of our existing paper.”
Now it has established its benchmark curves, Shrimpton says HBOS could now look at being a bit more opportunistic, although he says there’s nothing concrete in the pipeline yet. The company is also looking at new innovations in the unsecured market. “In the senior market, we would like to get more active in structured MTNs,” he says.
Best high-yield corporate borrower:
NTL
There was a lot of market noise in advance of UK cable company NTL’s recapitalization. Could the architect of one of Europe’s biggest high-yield bond defaults just two years before seriously come back to the market? And could a company that had only emerged from Chapter 11 bankruptcy protection the previous year after a £6.98 billion ($12.48 billion) debt-for-equity swap that left its shareholders empty handed ask equity investors for yet more cash?
In fact, NTL’s $1.37 billion rights offering last November was oversubscribed and afforded the new management the chance to get out and meet investors and convince them of the merits of the restructured company. This first part of the company’s recapitalization was to take out the most expensive pieces of debt that it was saddled with after the restructuring – its 2010 19% notes and its working capital facility maturing in 2005.
Still, completing the recapitalization with a new high-yield bond and accompanying jumbo syndicated loan facility this year was going to be a challenge.
“The debt markets had been closed to cable credits for a couple of years. NTL was the first big deal to hit the market and there were no real precedents,” says Guy du Parc Braham, director, leveraged finance, at Deutsche Bank, one of the four bookrunners and lead arrangers of the bond and loan, alongside Goldman Sachs, Credit Suisse First Boston and Morgan Stanley. “The capacity in Europe was relatively untested but the heavy trading in the distressed bank and bond debt showed that there was still significant investor appetite. Of course we had to bring other investors into the deal but the secondary activity gave us a good indication of the basis on which they would be willing to put in new money.”
Not only was the £800 million equivalent high-yield bond launched on April 2 the first European cable deal to come to market, it came in four tranches, three currencies and with fixed and floating elements, the later to address investor concerns about the potential of rising rates. There were sterling, dollar and euro fixed-rate tranches with maturities of 10 years and a floating rate 8.5 year dollar tranche.
It certainly took a lot of global coordination. NTL is a sterling-based company, so the challenge was to maximize the sterling tranche when most of the liquidity available was in euros and dollars.
In the end the £375 million sterling tranche was the biggest-ever high-yield sterling deal and was three times oversubscribed.
Mathew Cestar, executive director, high yield capital markets at Goldman Sachs in London, thinks the deal was such a success because investors bought into the story presented by the new management. “The new management team is very focused on customer satisfaction, whereas the previous management at NTL was more acquisition-focused. Also, the capital structure of the company is now more conservative in terms of leverage than it was in the past.”
When it is considered that previously NTL had borrowed over $17 billion to fund its acquisition drive, this was critical, and investors were convinced. The deal was priced below expectations, with the company paying 8.75% for the dollar and euro tranches and 9.75% for the sterling tranche.
NTL wanted to do its debt refinancing at a time when it could take advantage of the most favourable market conditions and, in this respect, it could not have really chosen a better time. “When you consider the level of volatility that has been present in European high-yield since, it was a great time to issue,” says Cestar.
Proceeds of the bond and accompanying £2.425 billion dual-tranche syndicated loan facility will be used to pay back in full the 2005 bank facility and redeem the outstanding NTL’s triangle 2007 debentures and the Diamond holding notes, due 2008. In their place, the company now has longer-dated debt and a much lower cost of funds.
Best structured finance borrower:
Northern Rock
HBOS might have been the first to issue a UK covered bond and its efforts are also rewarded in this section (see best financial sector borrower). However, in following HBOS to the market, Northern Rock was the first to really open it up for itself and other issuers.
In particular, the UK financial services group overcame the major limitation of HBOS’s deal, which was the 60% maximum loan to value for the collateral, increasing this to 75%. Yet Northern Rock also managed to obtain a triple A rating for the deal, despite the fact that it only has a single A unsecured rating, by introducing legal final maturities one year longer than the expected maturities, instead of HBOS’s prematurity tests. This way it will not default if it needs to have time to liquidate some collateral to repay the bonds.
Northern Rock couldn’t have followed HBOS’s structure slavishly even if it had wanted to, because HBOS is double A rated and has a much larger balance sheet. However, with these two devices, Northern Rock certainly made the structure more efficient, with fewer concessions to the rating agencies. Bankers believe these two elements will become industry standard. UK mortgage bank Bradford & Bingley, for example, is using much the same structure for its first covered bond.
“To HBOS’s credit, they came up with a very robust structure; ours is just the second-generation model,” says Carl Flinn, deputy treasury director at Northern Rock. ” Our Granite [mortgage-backed securitization] programme is very collateral efficient and we wanted to do this with our covered bond as well. Our deal establishes a 75% loan-to-value funding ratio and we also have the option to repurchase loans in arrears or award them a value of 40%.”
In fact, Northern Rock’s arrears are about half the industry average, which meant that going to a 75% loan to value wasn’t much of a leap for the rating agencies in any case.
The documentation had the added flexibility of including provisions to do future 144A issues, as the company took the view that with Basle II, there could be increasing demand in the US for covered bonds, as they are already natural buyers of agency products. The company decided that it may as well set up the documentation to do 144A issues and pay the expense now.
Northern Rock’s inaugural five-year e2 billion deal in April, structured and arranged through HSBC and Barclays Capital, with Dresdner Kleinwort Wasserstein as an additional bookrunner, went to a wide range of investors, with an impressive allocation going to banks. “This deal has a risk weighting of 20% versus 10% in most traditional covered bond transactions,” says Torsten Elling, head of covered bonds syndicate at Barclays Capital in Frankfurt. “Nevertheless demand was so strong that we sold 35% to bank treasuries, which is in line with 10% risk weighted deals.”
Investors were less concerned about the structural differences between Northern Rock’s deal and HBOS’s since they were impressed by Northern Rock as a credit. “They are very investor friendly and have a very smart team,” says Bill Blain, head of financial institutions debt finance and advisory at HSBC in London. “They could put three teams on the roadshow simultaneously around Europe and all of them could equally hold their own.”
However, as Katrina Haley, director of structured bonds at HSBC in London, points out, Northern Rock already has an excellent reputation as a structured borrower through its Granite mortgage-backed programme, from which it issued three times last year. “Their Granite funding programme competes with the likes of Holmes and Permanent Financing, the MBS funding arms of Abbey National and HBOS, which are much bigger institutions,” she says. “They have great name recognition.”
Flinn says that it is extremely unlikely that the team will do another covered bond this year, but he hopes covered bonds will become Northern Rock’s fourth and regular funding arm, alongside retail and wholesale funding and the Granite MBS programme.
“Our strategic aim is to grow assets under management between 15% to 25% per annum, which requires additional funding. From 2005 onwards we will undertake at least one covered bond a year but no more than two. We will endeavour to keep transactions at least four to five months apart and space them around our Granite transactions.”
