Issuer: UPM-Kymmene
Amount: $600 million
Issue type: yankee bond
Launched: November 24
Bookrunner: Merrill Lynch
Last month, following weeks of bond-market uncertainty, cancelled new issues and widening secondary-market spreads, Finnish paper company UPM-Kymmene and Merrill Lynch made a strong showing in the yankee market with a new issue that was heavily oversubscribed and was double the $300 million originally sought. It is one of the largest-ever corporate yankee issues from Scandinavia.
The success of UPM-Kymmene’s first yankee, which totalled $600 million split into a $225 million 10-year tranche and a $375 million 30-year tranche, confirms that the US market remains open to investment-grade corporates – even to less than top credit quality companies previously little known in the US. According to Patrick Currie, director at Merrill Lynch: “If a deal is marketed properly and broadly and the right story is told, issuers can still do size in this market.”
The deal was rated BBB+/Baa1 and had a spread over treasuries of 110 basis points on the 10-year bonds and 140bp on the 30-years. Such long-maturity debt with no strict financial covenants was always a strong attraction. “We are in a very capital intensive industry,” says Olof Bärlund, UPM-Kymmene’s vice-president of treasury. “We wanted to diversify our sources of funds and, perhaps even more important, felt we wanted longer-term money in our liability portfolio. The possibility for getting 30-year money in the European market is not very good.”
The deal was first mandated to Merrill Lynch at the end of April but was repeatedly delayed for regulatory reasons relating to disclosures made by the company during a series of mergers and acquisitions this year. One of the last of these was a $650 million acquisition in the US – Blandin, a lightweight-coated-paper mill – which will reinforce the company’s position as a market leader in magazine-paper production, where it ranks number two in the world to International Paper of the US.
The Blandin deal closed late in October, raising UPM-Kymmene’s US profile. Though proceeds from the yankee are not earmarked to fund the Blandin buy, selling it soon after the acquisition seemed “to be a natural fit”, says Bärlund.
Unfortunately, by this time investment-grade corporate bond markets in the US were beginning to be hit by fallout from the Asian financial crisis. Spreads on long-dated bonds of some BBB+ rated US borrowers widened by between 20bp and 30bp from mid-October to mid-November. Domestic US bond new-issue volume halved, running as low as $1.5 billion a week against a 1997 weekly average of $3 billion. “For a few weeks, turbulence in the market made it impossible to go ahead,” says Bärlund.
But during the second half of November, as secondary spreads narrowed from their widest levels, the company was ready to go ahead. Even now conditions were far from propitious. In the same week, JP Morgan was marketing a $250 million deal for the UK’s Rank, which it intended to split into two tranches of seven- and 20-year maturities. After investor resistance, Rank decided not to proceed with the 20-year tranche, opting for a smaller $200 million seven-year deal. Pricing any deal in such conditions is complex. In a bull market, bankers might look at secondary levels and price even tighter than that. Now, when they look at secondary levels they know there may not be much activity behind those prices and they may have to price new issues five to seven basis points wider. The process was even tougher for a first-time yankee borrower like UPM-Kymmene.
UPM-Kymmene took an initially cautious approach, looking for $300 million and hoping any revisions would be upwards. “We didn’t know how the markets would be, but we always intended to raise more if possible,” says Bärlund. A key to the deal was the intensity of the roadshow, taking in far more cities than was usual for yankee bonds in more benign markets. “UPM-Kymmene management were prepared to go anywhere to tell their story. Believe me, nine cities in four days was an extraordinary effort,” says Currie. The stops included Austin, Houston and Chattanooga as well as the more usual Boston, Chicago and New York. The deal eventually attracted more than $1 billion of demand from 60 institutions.
The way the deal was run also reflected the difficult market. Chase Securities, Citicorp Securities and Morgan Stanley Dean Witter, all firms with which UPM-Kymmene enjoys close relationships, were included as co-managers, but responsibility for placing the bonds rested squarely on Merrill Lynch. Merrill employed a pot system, with orders fed into a central book. It then generated an analysis of demand versus price which showed that $600 million offered the best combination of size and spread. It’s a marketing and syndication method reminiscent of book-building in the primary equity markets which leaves the lead-manager in complete control of the deal. Fees to co-managers are agreed before marketing and pricing begin and, though no-one involved in the deal will admit it, this leaves little incentive for the co-managers to do very much.
One advantage of the system is that the lead-manager can take great care in allocating bonds in a way that should protect the deal from underperforming in the after-market by allocating mostly to true long-term investors and less to more trading-oriented accounts. The risk for investors is that, with the lead firm dominating bond distribution, other firms may have little interest in trading the deal. Future liquidity will depend on the lead-manager’s willingness to make prices.
At least the early signs are promising. In the first few days of trading, spreads tightened by 5bp on the 10-year bonds and by 7bp on the 30-year bonds on reasonable volume. The true test may yet be to come.
One of of UPM-Kymmene’s attractions to US credit buyers is that it offers a reasonable spread and is a classic corporate restructuring. It has been busy strengthening its balance sheet and developing coherent global strategies in its operating businesses. It has been divesting non-core mills and, perhaps even more significantly, selling off non-core shareholdings, notably in Finnish technology and mobile-phone maker Nokia.
Delaying its debut yankee deal while these corporate deals were negotiated has forced UPM-Kymmene to pay a higher spread by at least 20bp and maybe more than it would have paid when the deal was mandated. But Bärlund can afford to be phlegmatic. “The spread was somewhat higher than it would have been before the turbulence,” he says. “On the other hand, the treasury rate’s now lower.”
