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Best sovereign bond issue
United Kingdom
Deal size: $3 billion
Date: June 2003
Joint bookrunners: Deutsche Bank, Citigroup, Goldman Sachs, Morgan Stanley The UK Treasury last entered the offshore capital markets in 1996. However, last year careful monitoring of the markets showed that there was a window to refinance foreign currency reserves more cheaply in the international markets than through gilts.
The Bank of England sought advice from lead managers with a good record. “There is a relatively small group of banks who really specialize in the sovereign/supranational sector, particularly in US dollars,” says Christopher Egerton-Warburton, executive director at Goldman Sachs. “The Bank of England did a lot of preparation internally to find a team that they thought would be complementary. They wanted a group of banks who they felt had the strongest distribution capabilities and would work in a cooperative way.”
In June 2003 the $3 billion five-year 144A Eurobond was launched, priced three basis points through US treasuries and 2bp over the UST May 2008. The rarity of the issue meant that the order book grew extremely fast. “We opened the books in Asia because the highest quality pockets of dollar demand are in the Asian central banks,” says Egerton-Warburton. “We deliberately announced the deal as a surprise to inject momentum into the deal. That meant that when the markets opened in London, it took the whole debate away about price and got investors to focus on the transaction.”
The issuer refused to budge from its initial volume of $3 billion even though demand reached about $12 billion. “The Bank of England felt strongly that if you have neither an existing reference price for something nor a fixed amount for sale, then how do you determine that you sold the bond at the right level?” says Egerton-Warburton. “In terms of dynamics with the investors, they felt it important to establish the amount they were going to sell upfront.”
The size of the book meant the distribution process was highly selective. Most allocations went to Asian and European investors. The UK Treasury’s opportunistic move deserves particular attention for its nimble timing. “One of many impressive aspects about the Bank of England’s management of the whole process was their ability to respond incredibly quickly to a narrow issuance window,” says Bill Northfield, director and co-head of the frequent borrower group at Deutsche Bank. “Their sense of timing was superb, because a few weeks later the Treasury market was more volatile after the June Federal Open Market Committee meeting, which would have made pricing the UK treasuries much more challenging.”
With the UK finance minister planning to issue £49.7 billion ($90.4 billion) of bonds in 2003-04, the UK Treasury could enter offshore capital markets again. “Never say never,” says Northfield. “I expect that any subsequent deal would still need to provide considerable value for money to justify bypassing the gilts market to
refinance the foreign currency reserves account.”
Deborah Kimbell
Best high grade bond
HBOS
Deal size: e3 billion
Date: July 2003
Joint bookrunners: Citigroup, DrKW, Goldman Sachs
Several countries, including France and Spain, have created new forms of covered bonds, involving lengthy changes in national legislation. But when UK banking group HBOS issued the first UK covered bond in July 2003 as part of a e14 billion programme, it did so without specific legislation and created not just a new type of bond, but a crucial new piece of its own debt-raising strategy.
The idea came from looking at existing covered bond frameworks and using English contractual law. “When we compared Pfandbriefe to RMBS, we asked ourselves what would happen if we gave the latter a corporate guarantee and that was the idea for the HBOS covered bond,” says David Basra, managing director of securitization at Citigroup. “Given the robustness of the English legal system, the creation of the HBOS covered bond was fairly straightforward.”
HBOS aimed to obtain low-cost funding, lengthen its maturity profile and diversify its investor base. The covered bonds were issued by HBOS Treasury Services, the funding arm of the group, and are guaranteed by HBOS Covered Bonds LLP, a new special purpose subsidiary. The order book closed with orders worth e4.7 billion, and issuance was increased from e2 billion to e3 billion.
The bonds were rated AAA/Aaa/AAA by S&P, Moody’s and Fitch respectively, revealing how bankruptcy remote this structure is. This first issue attracted traditional covered bond buyers, with a sizeable 32% allocated to German and Austrian investors. “The question was whether German investors would be interested, as the HBOS deal was 20% risk weighted,” says Sean Park, global head of debt syndicate and credit trading at Dresdner Kleinwort Wasserstein. “When the details emerged, their anxiety faded away very quickly. Firstly because of the way the deal was structured and secondly due to the very strong ratings delinking from HBOS.”
The deal has changed the UK’s participation in the covered bond market for good. “For a long time there hasn’t been a level playing field for UK financial institutions to tap into the covered bond investor base,” Basra says. “This new bond will enable penetration into this liquid sector where deals trade very tightly. To create a new market and diversify an investor base is a really great result.”
DK
Best M&A deal
Zimmer’s acquisition of Centerpulse
Deal size: $3.6 billion cash and stock acquisition, with a
$1.75 billion supporting credit facility
Date: October 2003
Advisers: CSFB (Zimmer) and UBS (Centerpulse)
The process from March to September last year that led to US orthopaedics firm Zimmer buying Swiss rival Centerpulse was peppered with disagreements, accusations and drama. But shareholders in both firms have made a healthy profit.
It was one of Europe’s biggest M&A deals of 2003 and shows how with equity prices still at low levels, hostile bids are back in fashion.
Centerpulse had come close to bankruptcy in 2002 after it lost a class-action lawsuit relating to defective prosthetics. So the company put itself up for sale, and in March came to an agreement to merge with the UK’s Smith & Nephew.
At this stage of the deal, the stories diverge. Zimmer felt that it had been excluded from the search for a buyer. UBS, which was advising Centerpulse, says it only ever sought to find a good deal for its client, regardless of where that might come from. “Our intention was always to find the best bid at the highest price,” says Liam Beere, executive director in M&A at the bank.
Now that the deal with Zimmer has been completed, these details do not seem to matter. Although the S&N bid had been approved by the board of Centerpulse, and by its main shareholders, at SFr282 per Centerpulse share, it was far lower than Zimmer’s later SFr350 bid in May. Now Centerpulse shares trade at around SFr455 and Zimmer’s have risen from around $40 to $77 since March 2003.
The deal is notable for the way it was structured. “This was a US offer into Europe involving equity consideration, which is still relatively rare,” says Beere. “This deal shows that if US companies are willing to use equity as an acquisition currency, they can be successful even in an unsolicited bid situation.” Indeed, a stocks and paper bid by Zimmer made the most sense as it did not want to risk losing its investment grade rating by making a pure cash bid. It was also the largest unsolicited bid and first successful competing bid in Swiss history, testing the new Swiss takeover code for the first time.
François Maisonrouge, managing director and head of European healthcare at CSFB, says the deal was fun. “It was a good deal in terms of being a good currency, it made good strategic sense, it was good timing, it showed good thinking… It was a very classy deal.”
Katie Martin
Best IPO
Northumbrian Water Group
Deal size: £2.2 billion
Date: May 2003
Adviser: Morgan Stanley
When Suez invited Morgan Stanley to advise it on the sale of Northumbrian Water, both firms expected a traditional private-equity house to buy the utility. But when bidding began, a consortium named Aquavit, led by Deutsche Bank, Ecofin and Collins Stewart, arrived with the task of convincing Morgan Stanley and Suez that it merited entrance into the auction.
The consortium was financed by a placing of 389 million new shares at 100p to institutional investors and by £935 million of debt facilities provided by Deutsche. Its aim was to achieve a better price by listing the company but this IPO would have to be achieved within the constraints of a competitive auction.
By April, there were three bidders, and finally Suez chose Aquavit to complete the £2.2 billion acquisition. The consortium bought the company for £880 million in cash and Suez retained a 25% stake in Aquavit with 130 million shares.
“It proved complex and many thought we were quite optimistic for forcing an IPO,” says Bernard Lambilliotte, managing director of Ecofin. “Then they saw how quickly the equity portion was being pre-placed and Morgan Stanley reacted impeccably in giving us the credit required to take this to completion.”
The market received the offer very positively, allowing Suez to maintain competitive tension right up to the end of the auction. The listing was the largest IPO in 2003 at the date of the transaction. “The initial investors in the 75% stake had no presentation by the management so they were effectively investing on the back of stable dividend yield and the reputation of the company,” says David Martin, group treasurer at Northumbrian Water.
DK
Best high-yield bond
Rémy Cointreau
Type of deal: senior notes due 2010
Deal size: e175 million
Date: June 2003
Joint bookrunners: BNP Paribas, Bank of America
When French wines and spirits company Rémy Cointreau issued bonds in 1998, it had to pay a 10% coupon. That deal was a rescue package completed through Bankers Trust, designed to help the firm recover from falling sales and from a large position on the US dollar that was further dragging down this family-owned business.
So it is a sign of how well the firm has recovered that when it came back to the market to refinance that debt in June 2003, it paid a coupon of just 6.5% – the lowest level ever in the European high-yield market. Nevertheless, the e175 million deal, which was increased from e150 million, attracted over e2 billion in orders.
The new coupon saves Rémy Cointreau about e4 million a year. “For a company like ours, that is significant,” says Françoise Cambilargiu, group treasurer. “We are very pleased with this deal.”
With such a large order book, the issuer and the bookrunners, BNP Paribas and Bank of America, could afford to be selective in allocations. “The investors came from 22 countries, which is unheard of in the high-yield market,” says Tanneguy de Carné, head of high-yield capital markets at BNP Paribas. “There was even decent demand from Asia.”
That sentiment is echoed by David Lofts, the head of institutional credit sales at Bank of America. “Investment-grade funds are becoming more comfortable with fallen angels,” he says. “For some of them, crossover credits now make up 10% to 15% of their portfolios. If you go back two years, most of these investors would not have been able to buy them, and when the companies were downgraded, they would immediately have had to sell.” With mainstream investors’ search for yield and with the growing presence of high-yield hedge funds in deals such as this, it is easy to see where demand came from. De Carné says that with such a quick investor response, the deal almost sold itself.
Both the banks also made good use of their links to private banking, placing 12% of the deal with retail banks.
Aside from the success of its distribution, this deal also served as a new mark of maturity for the European high yield market, because for the first time for an issue of this kind, it was completed under French law. Usually, the legal framework is an exported and modified version of New York law. Now the new template has been proven to work and can be used in future.
KM
Best leveraged buy-out
Seat Pagine Gialle
Type of deal: senior debt facility/subordinated debt facility
Deal size: e3.2 billion (senior), e1.15 billion (subordinated)
Date: June 2003
Joint underwriters and mandated lead arrangers: Barclays Capital, BNP Paribas, CSFB, Royal Bank of Scotland
Sponsors: BC Partners, CBC Capital Partners, Investitori Associati, Permira
Big deals are not necessarily groundbreaking – some are just big. But the large sum raised in this leveraged buy-out for Italian directories company Seat Pagine Gialle was significant for two main reasons.
At roughly 10 times the size of most European leveraged debt deals, it set a new market record. It demonstrated to all those who doubted that such a large deal could be done that there is ample investor appetite for jumbo deals. “It redefined what was deemed to be the level of available liquidity in the European LBO market,” says Nigel Pavey, director of global loans at Barclays Capital.
Secondly, because it was so large and needed to be distributed widely, it forced banks to clarify and resolve issues surrounding debt seniority. “This deal has definitely pushed that issue forward,” says Julie Gavin, managing director in loan capital markets at CSFB. In April 2003, CSFB also won praise when it created new subordination provisions in its role as joint bookrunning lead manager in the high-yield bond issue for UK food processor Brake Bros. “At CSFB we are an integrated team in terms of debt,” says Gavin, “so in all our deals we aim to achieve a balance between giving senior lenders meaningful protection whilst also optimizing terms for the bond market. In a deal of this size we had to have that. We had to make sure we were hitting every investor.”
The Seat Pagine Gialle deal came about because like many other European telecoms, Telecom Italia decided to divest its 62.5% stake in its directories business. A consortium formed by venture capital firms BC Partners, CBC Capital Partners, Investitori Associati and Permira won in the bidding process to buy that stake. “The venture capitalists were very high quality outfits,” says David Cottam, global co-head of telecoms and media corporate finance at BNP Paribas. “That was a key part in why this deal was successful.”
Fortunately for the banks arranging the financing, they were dealing with a sound business. “It is fabulously strong, and when you have got that, the deal becomes so much easier,” says David Yeoman, head of leveraged finance syndications at RBS.
The deal has also done well in the secondary market. “It is trading close to par and that sends a strong signal,” says Vijay Rajguru, director of leveraged loans at Barclays Capital. “It shows that people in the secondary market are active buyers, and there is more liquidity out there. That will help with the next jumbo deal.”
KM
Best equity-linked deal
Sol Meliá
Type of deal: Five-year convertible bond
Deal size: e150 million
Date: October 2003
Lead manager: Barclays Capital
At e150 million, Spanish hotel group Sol Meliá’s issue was not the largest of the year’s equity-linked transactions from western Europe. But it stands out because apart from being a rare Spanish issue, it illustrates several key themes in the European equity-linked market.
With ratings of BB+ from Standard & Poor’s and BBB– from Fitch, Sol Meliá is one of the growing number of non-investment grade and unrated companies that are raising fresh funds through these instruments. Two or three years ago, they accounted for just 10% of European issuance, compared with 50% in the US. In 2003, the figure for Europe was nearer 40%, as companies in a similar position to Sol Meliá’s took advantage of tight credit spreads, low interest rates, and the equity volatility that comes from being low rated.
For a bank without a cash equity markets business, this was a great deal for Barclays Capital. The conversion premium of the five-year bond is fixed at 80%, which is the second highest in the European convertible market. The bond will be callable from the end of year four subject to a 130% trigger. The coupon fell in the middle of the indicative range at 4.3%, which is not as low as the 4.05% at the bottom of the range but is still a fair price for the issuer.
On top of the distribution, Barclays Capital did a good job of supporting the share price. This is not easy, as Goldman Sachs and Morgan Stanley found after their convertible for Deutsche Telekom earlier in the year coincided with a 10% drop in the share price. In the Sol Meliá deal, participation from hedge funds was limited during allocation to avoid too much selling pressure, and the share price only dropped from e6.65 to e6.61 between launch and pricing. In addition, the bank provided market making on credit default swaps and guaranteed a stock borrow facility throughout the life of the bond so that investors would have a good range of data points from which to price the issue.
KM
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