The best deals of the last twelve months are a diverse bunch. They include Euroequities, property-linked securities, convertible bonds and even good old-fashioned syndicated loans. None is particularly flashy or innovative but they share certain features which guarantee success: all hit an unexplored niche in the market, all pleased both borrower and investors, and all earned substantial profits and prestige for their creators.
The key is rooting out unexploited demand in the market. Barclays’ long Euro-sterling bond did it. So did Canada’s 80 billion Eurobond, the first sizeable yen bond by a prime borrower. And Electrolux’s international equity offering sniffed out legal loopholes which allowed it to tap unsatisfied demand for foreign shares in Italy and Spain.
Euromoney makes no apology for excluding deals that were only one-sidedly beneficial. BASF’s bond-plus-equity warrant issue, for example, shot to 123 in a day. Great for the lead manager and quick-reacting investors; lousy for the issuer, which could have got its money more cheaply. Similarly, some of the year’s more abstruse innovations do not appear here.
BANK OF GREECE
Type of issue: Transferable loan facility
Amount: US $375 million
Lead manager/bookrunner: Citicorp Investment Bank
Signed: May 30 1986
Greece has long been a problem borrower, the size and regularity of its demands often infuriating bankers. In the first five months of 1985 alone, it raised three separate loans totalling $654 million. By the end of the year its continual loan requests, combined with a weak economy and fears of rescheduling, had led to Greece becoming virtually persona non grata in the Euromarkets.
With a borrowing requirement of $1 billion for 1986, Greece somehow had to engineer its rehabilitation. The answer? To offer such generous pricing–3/4% over Libor–that not even the most sceptical banks could resist the temptation.
The success of the deal was vital for Greece. Failure would have been disastrous, but in the event syndication went so well that the amount was raised from $300 million to $375 million, with more than 50 banks taking part. Arab Banking Corp provided the largest sum, $30 million, with a clutch of 13 banks from Japan, Europe and the Middle East coming in with $15 million each. Citicorp Investment Bank–rather surprisingly as it was bookrunner–only undertook to lend $11 million.
The loan has a maturity of eight years and is available for six months. Repayment is in seven equal semi-annual instalments, after a grace period of five years. The commitment fee is 0.375%.
Brian Woolley, executive director of Citicorp, was jubilant: “The price wasn’t the important thing for the Greeks, but we called the market just right. The whole transaction went extremely well.’
The facility proved to be a trail-blazer, softening up the market for two subsequent deals by Greece at more aggressive rates. A swap-driven loan facility, signed on July 11 for $140 million, cost the Bank of Greece only 0.25% over Libor. This followed a Swiss franc bond issue on which the coupon was a respectable 5 5/8%, roughly in line with rates obtained by comparable borrowers.
CANADA
Type of issue: Euro-yen bond
Amount: 80 billion
Lead manager/bookrunner: Nomura
Announced: January 30 1986
This issue is an object lesson in how to resuscitate a market in a single stroke. It was the biggest Euro-yen ever, had record low pricing at 6 1/8% and was, crowed lead manager Nomura, “historically significant.’
Canada had not issued yen bonds since a samurai issue which matured in 1984. Investors were attracted to the rarity value of Canadian paper and liked the liquidity provided by the mammoth size of the issue. Most Euro-yen issues are around 20 billion; the largest, apart from Canada’s, have been a 50 billion issue by the World Bank and a 40 billion by Barclays Bank.
Co-managers were not displeased either. Total communications were a healthy 1 7/8% compared to the 1 3/4% usual for top-rated corporate yen issues.
The paper was bought mainly by Japanese pension funds and other large yen investors. “This was good institutional paper,’ explained one co-manager. “Retail buyers were not so interested. They value higher coupons, rather than liquidity and a quality name.’
The trading yield soon went down as a new pricing benchmark for the five-year maturity sector. Previously, Euro-yen lead managers and investors had only the rough-and-ready comparison of Japanese Treasuries by which to judge pricing.
“Canada really added momentum and liquidity to the market,’ said Nobuo Funabashi of Nomura. And in late June the Canadians gave the sector an extra push with a similar size Euro-yen issue, this time with a maturity of seven years.
BARCLAYS BANK
Type of issue: Floating rate perpetual Eurobond
Amount: US $750 million
Lead manager/bookrunner: Barclays Merchant Bank
Announced: January 28 1986
Is there a pleasure sweeter than being proved right? Barclays shocked co-managers with the terms of this perpetual floater. Many said the pricing, which at only 1/4% over Libor made it the tightest perpetual ever, was absurd. But vindication for the lead manager was swift. Within a few hours the issue was increased by 50% and still traded well within the total fees of 20 basis points.
“We thought the demand was there and that the market could stand very tight pricing,’ said Anthony Stranger-Jones of Barclays Merchant Bank. “Perpetuals done previously by clearing banks were all very firmly priced and trading in very small quantities.’
The previous record for fine perpetual pricing was the National Westminster Bank series C issue in November 1985, which carried a similar spread over Libor but paid fees of 25 basis points. It was trading well above par before the Barclays deal was launched, indicating the potential appeal of this paper.
IMPERIAL CHEMICAL INDUSTRIES (ICI)
Type of issue: Eurosterling bond
Amount: 100 million
Lead manager/bookrunner: Morgan Grenfell
Announced: March 19 1986
Towards the end of 1985 a number of banks concluded that there was an unexplored niche in the Euromarkets: for a long-maturity sterling Eurobond. The maturity landscape was polarized: the UK domestic market had atrophied and few maturities were under 20 years, but in Eurosterling bonds were rarely longer than 10 years.
By March, ICI had agreed to the idea, put forward by Morgan Grenfell and Lloyds Merchant Bank, of issuing a 17-year maturity Eurosterling bond.
The fall in British interest rates had created strong demand for sterling-denominated bonds. This, believed the two merchant banks, would allow ICI to succeed in issuing a long Eurosterling bond without covenants. UK institutions had previously insisted on long-term paper being issued with covenants, which specify an overall borrowing target and financial performance ratio for the issuer.
On March 18, budget day, ICI and the two lead managers met to finalize the details of the issue. During the meeting, Raymond Cool, head of fixed-interest sales at Lloyds, received an urgent call on his cellular phone. Nigel Lawson, the Chancellor of the Exchequer, had announced the imposition of stamp duty on domestic bond issues. Eurobonds, which, as bearer securities, are exempt from tax, immediately became more attractive to investors.
“It was like manna from heaven,’ said Michael Lawrence of Lloyds Merchant Bank. When the bond was issued next day, investors, particularly UK institutions, snapped it up, seemingly unconcerned about the absence of a covenant. Within a day it was trading at 101, against a 99 1/2 issue price.
“The budget measure was an unexpected fillip,’ said Andrew Winkler, executive director at Lloyds. “But we had predicted a convergence of the Eurosterling and domestic markets for a long time.’
The success of the ICI deal spawned many imitators. But, lacking ICI’s brilliant–or lucky–timing, some of the later long-maturity sterling issues crashed. Land Securities, for example, came at the tail-end of interest in long sterling bonds and suffered as a consequence (See Never to be repeated Offers).
HANSON TRUST
Type of issue: Transferable loan facility
Amount: 1 billion
Mandated bank: Chemical Bank International
Signed: February 14 1986
The rush of billion-pound plus takeover bids in the UK during the past two years has produced a succession of notable credit facilities to finance them. Hanson Trust’s 1 billion loan to pay for the cash element of the 2.4 billion takeover of the Imperial Group was the largest sterling loan ever.
Despite the record amount of the credit, more than half a dozen banks responded within hours to the invitation to join the syndicate. “It seems the larger the amount you ask for, the faster people respond,’ said Jonathan MacDonald, associate responsible for syndicated loans at Chemical Bank.
Rival banks were unconvinced that the speed and success of the syndication were due to Chemical’s skilful handling of the deal. “Hanson just had to pick up the phone for five minutes, and everyone jumped on board,’ said one. Martin Taylor, a director of Hanson Trust, seemed indirectly to support this view. His bland explanation for the rapid uptake of the loan was Hanson’s strong banking relationships. “A large number of banks have worked with us often in the past, some of them for many years,’ he said.
The deal was a short-term credit with a seven-year maturity and three-year grace period. The price was not officially disclosed but was widely said to be 1/4% over Libor, rising later to 3/8%.
The facility had a remarkably short life. It was cancelled on May 12. More Imperial shareholders than orginally predicted chose to accept the offer of Hanson shares rather than a cash alternative. The loan was replaced by a new facility for 250 million. Pricing was slightly finer to reflect the smaller amount and movements in the market.
Although Chemical is the conglomerate’s main bank in the US, many bankers expressed surprise that it won the mandate at the expense of the more obvious choice, Lloyds. It was suggested–and predictably denied by Hanson–that Lloyds was snubbed because Imperial’s chairman, Geoffrey Kent, has a seat on its board.
SAMSUNG ELECTRONICS
Type of issue: Convertible Eurobond
Amount: US $20 million
Lead manager/bookrunner: S G Warburg
Announced: December 3 1985
The South Korean economy has perhaps more potential for growth than any other. But until now foreigners have had only severely restricted opportunities–the Korea fund, for example–to invest in this possible treasure trove.
The Samsung Electronics convertible Eurobond represented the first chance to plug directly into the Korean stock market. It is convertible from October 1987, when the government in Seoul is due to alter regulations to allow foreign purchase of shares in single companies.
A convertible by a Korean corporation had been expected for some time. Immediately after the Seoul authorities announced the envisaged reforms in early 1985, foreign securities houses went hunting for possible issuers. They hit on Samsung Electronic because, according to Song Yong Shik, manager of Samsung’s International Financing Section, “our growth rate was far higher than any of the other possible candidates’. What was Samsung’s motive? “We needed finance to expand our production capacity for VTRs . We compared various methods of borrowing and chose to do a convertible because it would cost us less,’ said Song.
The liberalization of the Korean stock exchange means that the conversion price calculation for Samsung’s bond is necessarily complex. It is the mean of 1271 (the average share price the week before the bond was issued) plus 30%, and the average share price during the week before the first conversion date. The maximum conversion price is 2923.
The thinking behind this mechanism, which reduces the sensitivity of the bond to the share price by a factor of 0.5, is that the Korean stock exchange, where p/e ratios have traditionally been around 5, will be radically re-rated with the arrival of foreigners. The conversion calculation divides the profits of the expected sharp rise in the share price 50:50 between Samsung and the holders of the bond.
The two put options may have been sufficient to relieve the doubts of any wary investors. The first, in December 1987, only applies if in the meantime the Korean government has changed its mind about foreigners buying shares. The second, in December 1990 at 117 to yield 8.25%, is intended as a quid pro quo for the tight 5% coupon.
Investors evidently liked the idea of buying an option on Samsung’s equity, but were worried by liquidity problems given the small size of the issue. The closure of the Singapore Stock Exchange in the week of issue also made buyers nervous. The price on the grey market consequently was weak, but by July the bond was being traded at 167, reflecting the meteoric rise to over 2,200 of Samsung Electronic’s share price in the meantime.
ISTITUTO PER LA RICOSTRUZIONE INDUSTRIALE (IRI)
Type of issue: Revolving credit
Amount: US $649 million
Lead manager/bookrunner: Citicorp Investment Bank
Signed: May 8 1986
This was the epitome of a satisfying deal for a lead manager. When first announced it was panned by the press, and rival banks tried to strangle it at birth. Its aggressive pricing and 10-year bullet structure were heavily criticised. Even Citicorp was worried that it had misread the market. During the early stages of syndication a director of the American bank reportedly said: “We’ve really done it now. I reckon we’ll have to take $100 million ourselves.’
However, syndication was rapid and the amount of the facility was quickly doubled from $300 million, with Citicorp closing the books at $649 million. Even rivals were impressed. The syndicated loans manager of one large commercial bank said: “I have to eat my words. They were very brave margins and Citicorp managed to pull it off.’
The price, at 1/8% over Libor with a commitiment fee of 10 basis points, was admittedly tough. Most borrowing by Italian state entities during 1985 and early 1986 had been at 3/8% over Libor. IRI itself borrowed at this rate in February last year. But since IRI’s May 1986 facility, 1/8% over Libor has become a benchmark for similar maturities. It undoubtedly also brought down subsequent Italian pricing. Mediocredito Centrale, a state-owned bank, for example, achieved 1/16% over Libor rising to 1/10% over in a deal signed in June.
Japanese banks provided the mainstay of IRI’s syndicate. Eleven of them, including all the principal city banks, were among the 22 lead managers for the loan. Italian banks naturally were also involved: Banco di Roma, Banco di Napoli, Banca Nazionale del Lavoro and Credito Italiano all came in with more than $20 million.
Why was the deal so eagerly taken up? IRI is 100% state-owned and so almost a sovereign-quality risk. And, according to Citicorp, although the pricing was not overgenerous, IRI does expect to draw the credit for most of its life.
But more importantly banks prefer a miserly 1/8% over Libor to the even tinier commitment fees for standby credits, on which most now have to survive. “Banks are simply desperate for more assets,’ Citicorp explained.
ELECTROLUX AB
Type of issue: Syndicated secondary equity offering
Amount: Skr2.2 billion ($275 million)
Lead manager: Enskilda Securities
Announced: May 28 1986
This offer of eight million new B shares, representing about 13% of Electrolux’s equity capital, broke new ground in two directions. It was the first foreign share offering available to Spanish investors, and in Italy it was sold in the innovative form of Italian Depository Receipts (IDRs).
For each region, usually a single country, Enskilda, the bookrunner, appointed one lead manager allowed to approach clients only in that region. “Otherwise investors get calls from a host of co-managers all quoting different prices. That hardly inspires confidence in the issue,’ explained Thomas Hughes-Hallet, a director of Enskilda. “Anyone we thought likely to break the system, we simply allotted less.’
Even in the UK, where the tranche on offer was co-led by Enskilda and Cazenove, the two houses divided the client list between them to prevent confusion.
Other houses, however, were unimpressed. Some argued that this form of syndication was necessity dressed up as virtue. They claimed that Enskilda did not have sufficient placing power to lead-manage an issue of such a size on its own.
The equity was placed almost entirely outside Sweden, Electrolux’s home base. Shares worth $50 million were for the first time sold in Spain, taking advantage of the recent liberalization of Spanish foreign exchange regulations. Electrolux is committed to spend the proceeds of the Spanish tranche on capital investment in its local subsidiary, Ibelsa-Zanussi.
In Italy Mediobanca, the lead manager of the L70 billion ($44.2 million) tranche, developed IDRs, a copy of American Depository Receipts, to increase the attractiveness of the issue to Italians. Investors buying IDRs instead of foreign shares can avoid the requirement that they place a non-interest bearing deposit with the Bank of Italy.
The offering was well received in the market, Despite unfavourable circumstances –industrial action was threatened in Sweden at the time of the launch–investors leaped at the chance to buy a share in the world’s largest manufacturer of white goods (fridges and freezers, for example). The stock initially rose from its issue price of 278, but has since fluctuated between 265 and 295, due to the weakness of the Swedish market.
Electrolux’s object in offering new shares was to finance the acquisition of White Consolidated, a US manufacturer, which cost $760 million in cash. The deal was finalized at the end of April. Before this offering, Electrolux’s equity capital consisted of two million free A shares and 59 million free B shares.
Enskilda claimed that the success of the equity offering was due to good groundwork. “What appealed to investors was that the transaction was well known in advance. It came as no surprise,’ said Hughes-Hallet. The AGM of Electrolux six days earlier, when the share issue was agreed, had prepared the market, he claimed.
BILLINGSGATE CITY SECURITIES
Type of issue: UK domestic bonds and equity
Amount: 61.2 million
Lead manager/bookrunner: Goldman Sachs, Baring Brothers
Announced: June 13 1986
With this deal investors had their first opportunity to invest in a single City of London property. Securitization of real estate — already a developing, if sometimes problematical, market in the US–had arrived in Britain.
A total of 61.2 million was raised by the public offer of first mortgage bonds and preferred ordinary shares representing an investment in Montagu House, the future home of merchant bank Samuel Montagu on the site of Billingsgate fish market. The property is valued at 79 million.
The bond, secured by the property at more than twice cover, came with a fixed coupon of 6 5/8% and was priced at 67.52 to give a yield to maturity of 10.56%. It was bought, according to lead manager Goldman Sachs, by typical purchasers of UK domestic debentures, the 40 largest institutions. They liked the tax advantage of its deep discount.
The equity issue of 25.79 million shares appealed to a wider diversity of investors, including smaller pension funds and a scattering of individuals. The equity portion of the deal was designed to produce higher returns, with gross dividends rising from 4.32% in year one to 11.59% in years 10-14 and 22.65% in year 20, assuming a rental growth of 7%. But the bonds are in the senior position and thus less risky. The bonds raised 35.4 million, the shares 25.8 million.
The vehicle created to allow the flotation is Billingsgate City Securities, a single asset public property company or SAPPCO. S & W Berrisford, developers of the property, will indirectly hold 100% of a third class of capital, ordinary shares, in Billingsgate.
For lead manager Goldman Sachs this deal marked the first step to establishing a real estate department in the UK to complement its substantial property-related operations in the US, where it is particularly strong in the field of mortgage securitization. Its operations in New York have not been an unmitigated success, however. Last year’s equity plus Eurobond issue secured on the Rockefeller Center in Manhattan, which Goldman Sachs arranged with Shearson Lehman, has raised controversy. One of the largest tenants, NBC, has threatened to move out, and investors are suing the two investment banks for their alleged overvaluation of the property.
Foreign banks are not allowed to be sole underwriters of UK domestic debt and so Goldman Sachs teamed up in the Billingsgate deal with Baring Brothers, which has considerable property expertise in the UK.
Samuel Montagu, the future occupant of the building, decided not to take part in the issue. The bank is still negotiating certain aspects of the lease agreement and has complaints outstanding against the builder about alleged defects in the construction. “Consequently we felt there would be a conflict of interest between us as an underwriter and as a tenant,’ said Richard Tickner, an executive director at Montagu.
The deal was generally well received. What criticism there was centred on possible illiquidity. Both lead managers have pledged to maintain a secondary market for 20 years, but even Goldman Sachs agreed there would not be the same liquidity as for industrial securities. They argued, however, that once other property-linked issues had appeared, investors would be able to switch in and out, producing a more active market.
“We couldn’t be happier. It was obviously difficult organizing the first deal of this kind, but we see a lot of broad applications in the future. There is a lot of interest both among investors and property-owners,’ said Brian Maier, an associate of Goldman Sachs.
