BEST JAPANESE BORROWER
NTT
It has taken a long time for the Japanese market to recover; investor sentiment has been painfully low. But a handful of the top-rated borrowers have bravely tapped the Euromarket and led the start of a revival. Nippon Telegraph and Telephone Corporation (NTT) was the third purely Japanese borrower to issue a non-yen denominated deal (after Jexim and the Japanese Financial Corporation for Municipal Corporates) since Jexim had issued last July, and was the first Japanese company to come back to the Euromarkets in over a year.
On March 2 it launched a $500 million five-year deal, lead-managed by Merrill Lynch and Warburg Dillon Read. It was launched at 75 basis points over treasuries and has since tightened to between 15bp and 20bp over. The company’s excellent name has helped make the deal a success. “They are the best-rated company in Japan. It is a very prestigious name,” says Tomonori Ito, managing director and co-head of corporate finance at Warburg Dillon Read in Tokyo.
At the end of April NTT launched a e750 million ($786 million) seven-year deal, lead managed by Deutsche and Paribas. It tapped into a different investor base, including France, Germany and Italy, instead of its typical Swiss and Benelux buyers.
Its approach has been prudent given that the market is still unforgiving. “They don’t try to squeeze out every penny,” says Ito. Its borrowing strategy remains simple: it wants to keep its diversified investor base and get an attractive long-term cost of borrowing. For its March US dollar deal, over 80% of the issue went to Europe. “In order to achieve these goals we commit ourselves to the Euromarkets,” says Shigeto Katsuki, senior manager at NTT.
It has a reputation for being a very demanding borrower and for being one of the best names in the marketplace. Since it is the most attractive corporate in Japan it demands a lot from its bookrunners and the lead managers have been different for both deals. It asks a lot in terms of service and expects bookrunners to be willing to run to their office at any time, according to one insider. But it has also earned respect. “They are one of the most sophisticated borrowers,” says Ito.
Alex Mathias
BEST ITALIAN BORROWER/BEST BORROWER IN SYNDICATED LOANS
Olivetti
If we gave our award for the best syndicated loan borrower on the basis of cost alone, we’d give it to Mannesmann. The German telecoms-to-engineering group has fuelled its international ambitions with some of the lowest all-in-cost bank finance ever seen. In fact, if you only go by price, Olivetti is a candidate for worst borrower. It is paying 2.25% over Libor, when 50 basis points is the going rate for a single-A/triple-B.
Mannesmann is paying eight German banks only 1.5bp in fees for a e7.65 billion jumbo loan priced at 50bp over Libor, in order to finance its Italian expansion. But this is the old style of European relationship banking. A source at co-lead arranger Commerzbank claims the syndicate members can make a worthwhile profit from such stingy fees. But she admits the deal partly reflects the bank’s hope of other kinds of business from Mannesmann.
Olivetti’s achievement is to show that previous ideas about the international loan market’s capacity no longer apply. It put together a loan facility of e22.5 billion ($25 billion) by March 1999, to cover the eventuality of winning 100% of Telecom Italia’s ordinary shares in a hostile takeover. In the event, Olivetti has won 51.87% of Telecom Italia, and needs to draw down only a trifling e6.8 billion of its overdraft. In the process, it has shown what mountains can be scaled in the new euro loans landscape.
All of Olivetti’s group of investment-bank advisers played a role in arranging the loan finance, but market leader Chase was particularly important. As 1999 began, Chase, Lehman Brothers, Donaldson Lufkin & Jenrette and Mediobanca found themselves confronted with a request to finance a $60 billion takeover, paid for mainly in cash. How do you design and market a loan for such an unprecedented task?
Since the takeover plan was top secret, Chase, Lehman and co. couldn’t go around the world’s banks sounding them out. Instead, they assessed every international bank’s past behaviour and came to a judgment about what they might be willing to commit to.
Marco Figus, who ran the financing operation for Lehman, says: “It is an issue of feel rather than science. All you can do is look for fair pricing to try to entice people to accept.” High fees, a high margin, and a short exposure with fast amortization would be needed.
Don McCree, head of European syndicated finance at Chase, says: “We felt that $25 billion was all the market could take, because it was a 100% new money raising exercise, and it was a hostile takeover, so some banks were conflicted.” He adds: “We were too conservative.” Olivetti would eventually get commitments for over $30 billion despite the presence in the market of competing jumbo loan arrangers working for Telecom Italia and Vodafone.
Olivetti and its advisers realized that they were trying to entice banks who saw Telecom Italia as a blue-chip and Olivetti an upstart. The answer was to create a deal frenzy, by putting an outlandish amount of money on the table. A e1 billion contribution to the underwriting syndicate would get 175bp in fees, as well as the 225bp margin. With takeover target Telecom Italia’s $9 billion cashflow, Olivetti had scope for fireworks. Between 40 and 50 banks approached the Olivetti camp with offers of e100 million to e500 million, only to be turned away: e1 billion was the entry ticket.
The arrangers paid high-level visits to 30 banks which had not felt conflicted, nor were put off by the demand for e1 billion. Olivetti chief executive Roberto Colaninno spent between one hour and three with the banks’ heads, explaining the motives and mechanics of his assault on Telecom Italia. Many banks had never lent that much money to a corporate in one go. Only four out of 30 turned Colaninno down. About 60% of the money was raised in Europe, 30% in north America, and 10% in Japan.
McCree says of Olivetti’s achievement: “It’s changed the landscape and the mentality of what can be done. We have seen a marked increase in dealflow as a result. Chief executives and CFOs are now thinking seriously about acquisition finance.” As for the record size of the credit extended to Olivetti: “The syndicated loan market can provide what no other market can provide. There obviously is a top end. But I don’t know what it is. Perhaps e50 billion?”
Besides the huge syndicated loan, Olivetti has raised e7.9 billion in the Eurobond market. The floating-rate notes in the name of subsidiary Tecnost are a payment in kind for Telecom Italia shares, but the expectation was that shareholders would typically sell the notes straight into the secondary market, realizing their cash value. In order to convince them the Olivetti offer for their shares was worth the nominal e11.50, Olivetti had to create a market hungry for its bonds.
As with the loan, success required showing the market a generous amount of money. Olivetti’s head of corporate finance Luciano La Noce told London bond investors in May that “185bp over Euribor should not be considered a spread for the credit. It’s a spread for the size. It’s a minimum of 100bp over the normal price”. A large group of market makers was assembled in May, and a book of offers for the bond at par value totalling about e10 billion was compiled.
This means that, in a roundabout way, Olivetti has sold the largest-ever corporate bond, beating AT&T’s $8 billion effort in March. Back in January, Olivetti had already launched one of the early landmark issues that showed European investors were buying corporate credit like never before. That e1.5 billion issue already looks modest compared to Olivetti’s latest adventures.
The Piedmontese firm has had a colourful history, moving from typewriter-making into computers, nearly mismanaging itself into bankruptcy, reinventing itself as a telecoms company and finally as a hostile leveraged buyout fund. Along the way, it has contributed as much as any borrower to the coming of age of Europe’s capital markets.
Marcus Walker
BEST USER OF ASSET-BACKED SECURITIES
Citibank
Citibank has been considered a leader in asset securitization for years. The US bank’s innovation and structuring prowess was the key to its success in all the main securitization markets: conduits, private placement and public markets. This position was strengthened when it joined forces with Salomon Smith Barney in October last year.
Mortgages loans and credit cards are the main assets Citibank uses to collateralize its funding requirement. “We raised roughly $10 billion from credit card asset backed securities and another $6 billion from mortgage loans,” says Charles Wainhouse, treasurer, capital structure and global securitization, at Citibank in New York. “In addition you have to take into account our CP programme in the US,” he says.
Part of its funding is raised in the international capital market through a series of fixed and floating-rate notes. Since the beginning of the year, nine Eurobonds, eight of which were led by Salomon Smith Barney, were issued by Citibank Credit Card Master Trust raising a total of $4.5 billion.
The bank is aiming to raise at least 25% in foreign currencies with a deliberate target of widening its investor base. No bond has yet been launched in euros but Wainhouse does not exclude issues in the new currency. “The euro market is only five months old and we are still evaluating it,” he says.
Citibank’s asset-backed team is known in the market for being cautious. “Wainhouse and his team have been operating successfully since the mid-1980s and the major part of their success is that they are very meticulous and they study the market very careful before issuing,” says Peter Schmuki, managing director at Credit Suisse First Boston in London. “I remember the first Swiss franc deal they did with us in 1997. They wanted to know everything about the Swiss Franc market and the regulatory law. It took one and a half years.”
The Swiss franc issue is the only non-dollar deal Citibank has done over the last 12 months. Launched at an effective rate of two basis points over Libor, the six-year Sfr1.25 billion ($830 million) floater was issued on April 29 when the cost of swapping between the Swiss currency and the dollar became cheaper.
“A bank such as Citibank that issues asset-backed bonds in foreign currencies has to swap them back into dollars, so the cost of the basis swap becomes fundamental,” explains Schmuki. “During the last few months this cost between US dollars and Swiss francs has been up to between five and six basis points and only recently has it gone down to between two and three and that makes an enormous difference,” he says.
Luciano Mondellini
BEST COMMERCIAL PAPER BORROWER
Kreditanstalt für Wiederaufbau
Bold predictions are flying around the Euro-commercial paper (ECP) market. The advent of the euro has made the creation of a deep and liquid European money market a real possibility. There is talk of the ECP market tripling in size to $500 billion in outstandings by the end of 2001.
Such a vision is not entirely fanciful, suggests Dieter Gluder, first vice-president and head of money markets and domestic capital markets at Kreditanstalt für Wiederbrau (KfW). It is, after all, one of the reasons that KfW signed a e5 billion ($5.32 billion) multi-currency CP programme in December 1998, on which it already has approaching e1 billion outstanding.
“Our outlook for the ECP market was for it to develop in the same way as the US market,” says Gluder. “So we wanted to establish KfW in that market from day one, as one of the best sovereign issuers.”
KfW, which is 80% owned by the German federal government and 20% by the Länder, has had a strong presence in the US CP market for approaching 10 years, with on average around $3 billion outstanding. It had been dissuaded from establishing a CP programme in Europe by the Bundesbank’s strict minimum reserve requirements for short-term debt. But with the new, more liberal reserve requirements installed by the European Central Bank at the start of this year, KfW saw its chance to establish a short-term funding programme in Europe.
The programme it eventually signed showed an appreciation of the embryonic state of money markets in Europe. Included on it were domestic dealers in both France and Germany recognition that domestic markets maintain their attraction for local investors. But the key feature was the listing of the programme in Frankfurt (most ECP programmes are unlisted). The listing allows KfW’s CP to qualify as a regulated security under European fund management legislation, avoiding a rule that limits French funds to investing just 10% of their portfolios in ECP. It also enables investors to count it as tier-one collateral with the ECB.
“Being tier-one eligible is interesting for a lot of funds and banks throughout Europe, although it’s not perhaps a feature of the programme that’s well known at the moment,” says Gluder. “I think in the long run more banks will become investors in tier-one eligible paper, and not necessarily KfW’s.”
So far in 1999, Gluder suggests that ECP has been “an investor’s market”, thanks mainly to a glut of supply. Sovereigns across Europe had arrived at the same conclusion as KfW, that the ECP market was going to provide the core pool of short-term liquidity in Europe, and new programmes from Austria, Finland and Italy joined those of Belgium and Sweden in an increasingly crowded market.
According to Gluder, the situation exposed the immaturity of the ECP market. “If you compare our experiences in the US and Europe, when we entered the US there was already a bracket for KfW in the market, because the market was mature and there was a group of established credits against which we could compare ourselves,” he says. “But in the ECP market there is no issuer constantly pricing across all maturities and providing flexibility for investors. Even the sovereign T-bill programmes just tend to tap the market at certain times, and among the sovereigns pricing remains inconsistent.”
Because each of the new borrowers was finding its feet in the market, there was a lot of cheap sovereign paper in euros for investors to buy. The levels sovereigns were offering, Libor minus single digits according to Gluder, were not of the sort to interest KfW. The result has been a lot more issuance in US dollars, swapped back to euros, than Gluder initially expected.
“In euros we aren’t an opportunistic borrower,” he explains. “We want to establish a permanent position and at the right price level.” He is therefore quite happy to wait for the market to become more rational and suggests that it may even take the appearance of the German or French state treasuries in the market to establish a consistent benchmark for issuing out to a year. “Given that we are a government credit it would give us the opportunity to improve our levels,” he says.
While there have been larger and more active CP programmes signed in the past year, KfW exhibits a long-term commitment to the market, and an understanding of its nuances, found in few other borrowers, old or new.
James Rutter
BEST USER OF STRUCTURED BONDS
Cades
With the e1.5 billion ($1.6 billion) bond launched on March 17, Caisse d’Amortissement de la Dette Sociale (Cades) has become the first European agency to issue an inflation-linked bond.
Dubbed the Cadesi, the 14-year-and-four-months issue, led by CDC Marchés, Crédit Agricole Indosuez and Société Générale, followed the success of the 10-year inflation-linked OAT launched by the Republic of France last September.
It is confirmation of a trend that may become important over the next few years. “Republic of France is likely to issue another inflation-linked in the 20- to 30-year sector and we decided to tap the 15-year market so as not to overlap with the issues of the sovereign,” says Christophe Frankel, head of capital markets at Cades’s headquarters in Paris.
The rationale behind the choice is the particular source of revenue of the French agency. “Almost all our assets come from income tax and therefore are linked to inflation,” explains Frankel. “So this kind of issue is perfect for our asset and liabilities management.” Cades’s main source of funding is an income-related tax called CRDS (Contribution au Remboursement de la Dette Sociale).
The bond was placed primarily in the domestic market, which bought nearly 75% of the issue. Institutional investors across the rest of Europe purchased the remaining 25% after intense roadshows in all the region’s main financial centres.
“That issue was brilliant,” says Guillaume Ridaud, euro-syndicate at Paribas in London, which participated in the issue as part of the selling group. “Cades understood once again what the market wants from such an agency: liquidity and a fair price,” he says. “Also, in inflation-linked bonds, the longer the maturity the better, and I think 15 years is an excellent choice.”
The success of the deal has convinced Cades to increase the issue as soon as market conditions allow. “The ideal thing would be an increase of e500 million before the summer,” admits Frankel.
Cades was created in January 1996 to amortize past debts accumulated by the French social security system. The agency is rated triple-A although it does not have the explicit guarantee of the government. It raised a total of just under $5.4 billion in the international markets over the past twelve months.
In addition to the inflation-linked bond, Cades has tapped the market another eight times since July 1998. The only other major transaction, however, was a e1.5 billion five-year benchmark on the five-year curve launched on January 22 through Lehman Brothers, Nomura and Paribas. Along with another two smaller transactions in euros, the other issues included deals in sterling and in US and Hong Kong dollars.
Frankel makes clear the different goals of these bonds. “When we tap the euro market we want to create a benchmark in what we consider our main market. When we issue in other currencies, it is to widen our investor base or for opportunistic reasons of arbitrage,” he says.
At the moment the agency is not looking for further US expansion, pleased with what it has already achieved. “In the US market our name is already well-known for our CP programme, but we have no plans for the bond market,” concludes Frankel.
Luciano Mondellini
BEST HIGH-YIELD BORROWER
Telewest
Telewest, the UK’s largest cable company, did a good turn for the US high-yield market last year and lit the way for the return
of European high-yield borrowers. Its November blowout transaction helped reopen the high-yield market at a time when many of the highest quality borrowers were still finding it difficult to return. “It is the Argentina of high yield,” says Manuel Carellet, managing director of debt capital markets at ING Barings.
Telewest’s $350 million 10-year deal was launched on October 27 and led by Donaldson Lufkin & Jenrette. It was priced at 668 basis points over US treasuries and tightened considerable after launch. The deal was driven by US demand; about 90% was sold to US investors. It was increased by $50 million from $300 million, and received $500 million of demand. “The US investor base has embraced it,” says Geoffrey Stern, managing director in investment banking at DLJ in New York. “It is a believer in UK cable. It is easier and more attractive for UK cable companies to borrow in the US where there is an established investor base.”
The borrower, which issues frequently in size, is well liked by US investors. The B1/B+ rating is not a deterrent to many borrowers. “This is one of the hallowed names in the US credit market” says Stern.
When Telewest acquired General Cable last September, 44% of Birmingham Cable Corporation came with it. It already owned 27% of the company and there was an option to buy the remaining 27%. It needed to tap the capital markets at this time to refinance the bridge loan for the £138 million ($221 million) acquisition. Since the market was beginning to bounce back by late October, and NTL had tested the waters, Telewest made the decision to move. “There was a window of opportunity,” says Charles Burdick, chief financial officer at Telewest. “But we didn’t know how long it was going to be there. We decided to go for it.” Book-building was quick and the pre-marketing needed was considerably smaller than for most US high yield deals because of Telewest’s strong name.
This May, Telewest secured a new consolidated credit facility of £1.5 billion to refinance its debt. The facility is made up of a £300 million convertible bond issue which was launched at the beginning of February and two 10-year zero-coupon bonds of £325 million and $500 million launched on April 1.
This year its borrowing requirements will be doubled from last year. It aims to raise £700 million of debt, split £300 million in convertibles and £400 million in the high-yield market. Besides getting a boost to its borrowing, Telewest also got an equity boost as well. When Microsoft announced earlier this year it was considering buying a 29.9% stake in the company from MediaOne, Telewest’s shares rose by more than 12%.
Alex Mathias
BEST PFANDBRIEF BORROWER
DePfa
DePfa has been the first brave soldier to break away from the German Hypotheken bank troop. In October it announced that it would leave the Association of German Mortgage Banks over a difference in opinion on how Pfandbriefe should be classified. According to a press release from DePfa, the bank “is in favour of ceasing to apply the specialist banking principle” and it supports a European Pfandbrief initiative.
As the largest and most international of the Pfandbrief-issuing German banks, as well as the largest private issuer in Europe, it welcomes the potential competition that a more encompassing law would bring. DePfa “believes that it is more important to employ highly specialist and meaningful risk assessment instruments rather than restricting activity in the lending business”. Such is its confidence, it wants to open up the market further.
DePfa is a leader among its Pfandbrief-issuing peers. “We have much broader funding and our funding strategy is more and more international,” says Christoff Schörnig, executive director and co-head of treasury at DePfa. The bank is already the largest non-government bond issuer in Europe but is working hard at increasing its investor base further.
It is actively marketing itself worldwide for its Pfandbriefe and its other borrowing activities. This year the team has travelled to Asia three times already and has converted its Tokyo representative office into a branch.
“We go everywhere in the world that makes sense,” says Schörnig. This year it has also roadshowed in Australia to develop access to the kangaroo bond market. Its aim is to launch large issues that will distinguish it from traditional Hypotheken banks whose issues are smaller.
“Liquidity will be the main driver for triple-A borrowers. Competitors aren’t able to issue in such large amounts, which is an advantage we have,” says Schörnig.
In January 1998, DePfa launched a global Pfandbrief programme, which it compares to Fannie Mae’s global Benchmark Notes programme. The goal of this programme for DePfa is to tap into the demand for superliquid deals that are changing the market.
All issues under its programme will have an initial volume of between e3 billion ($3.2 billion) and e4 billion. Its fifth and latest global Pfandbrief, launched on January 28, was worth e3 billion at a 10-year maturity. It was the first of its kind to have a repo back-stop facility for 5% of the total issue, which was designed to make the bond more liquid in the secondary market. One gauge of the programme’s success is international investor interest, which has been substantial. Some 80% of its most recent global issue was placed outside Germany.
DePfa lists a number of goals for the upcoming months, and it is already well on its way to achieving many of them. It aims for a more international focus, to extend its maturity curve beyond 10 years, to get a repo market started and to further enhance liquidity. The bank is already quite heavily involved with CP and MTN markets, with an ECP shelf of $7.5 billion and an MTN shelf of e20 billion. It is setting up a further US CP programme to be initiated in June or July. One of its main goals has been to “give the market a product alternative to government bonds,” says Schörnig. DePfa is doing just that.
Alex Mathias
BEST USER OF FOREIGN MARKETS
YPF
YPF, the Argentine privatized oil company, was the first Latin American private company to tap the international capital markets after the turmoil of last winter. In a period dominated by global bonds, YPF’s decision to issue a yankee was pretty much singular. But many things back the choice, not least the company’s reputation in the United States. “We have some advantages in issuing in the US domestic markets that come from our borrowing history,” says Carlos Felices, director of international finance at YPF.
Felices explains that YPF has been issuing in the yankee markets for a long time and US investors have come to be familiar with the performance of the credit as well as the profitability of the company. That has given YPF’s bonds significant liquidity in that market. “In the United States, investors know they can trade our paper very easily in the secondary market,” he explains.
They also know the difference between YPF and the sovereign something that isn’t clear to everybody. Standard and Poor’s rates YPF at BBB-, placing it ahead of the Republic of Argentina, which has a BB rating. “European investors take our sovereign as ceiling and we are penalized,” says Felices.
Indeed the deal performed better that the sovereign. The $225 million 10-year yankee bond was successfully launched at almost 300 basis points over the sovereign yield curve. Led by Merrill Lynch, the issue was increased from $150 million and launched at 412.5bp over treasury, at a time when the Republic of Argentina’s 2006s have been trading in the region of 705bp over and its 2017s at around 669bp over. Only 6% of the deal went to Europe. “There is no point in preparing all the documentation and paying fees for a global when you know your issue will be placed and traded almost entirely in the US market,” explains Felices.
But while European investors may not appreciate YPF in the way that Americans do, the same cannot be said of European corporates. On May 11, YPF approved a $13.4 billion takeover offer from Repsol, Spain’s leading oil and gas group. The acquisition signals a big step forward in Repsol’s international expansion plan. The new group will be among the 10 largest oil groups in the world and the merger is claimed to be good news for YPF’s investors. “For them it is great news because it means the bonds in their hands are much safer than before,” comments Felices.
YPF is also planning to launch a new bond in the next few months. The amount has yet to be decided but, according to the issuer, it will be a structured issue with an A- rating, and will be guaranteed by the US government agency, Opic. “That will allow us to borrow at a level very close to many US corporates,” says Felices.
Luciano Mondellini
MOST RESPONSIVE BORROWER
GECC
Who is the most popular borrower in the capital markets playground? General Electric Capital Corporation (GECC), the world’s second largest company, has made itself many friends. Its triple-A credit rating, frequent issuance, and liquid deals have given it such a good reputation that it gets virtually instant investor acceptance when it taps the international capital markets. It has issued 92 deals in the past 12 months in 17 different currencies there have been 10 deals in May alone. Its receptiveness to both investor demand and bookrunners’ advice has garnered it a good reputation that has remained intact even through the worst months of the economic downturn.
“Usually borrowers want to issue what they want. [GECC] hear what investors want and they offer it. They always issue a huge number of deals and are very responsive,” says David Ovenden, global head of fixed income syndicate at Paribas.
One strategy it uses to ensure frequent issuance without flooding the market is constantly rotating the investor base. It might issue a 12-year euro, then a two-year multi-currency floater, to a 10-year dollar bond, back to a five-year euro.
“They do tend to move around in the markets. They don’t abuse or pressurize one type of investor too much,” says Ovenden. Geert Vinken, a director at Barclays Capital, echoes this sentiment: “GECC always ask the investor.” This approach made it possible to launch a 13-year Ffr1.2 billion ($192 million), a $100 million 15-year and a e375 million ($393 million) 17-year, all within six days of each other last August.
The French franc issue launched on August 5, led by Paribas, was one of the company’s most notable deals. It was priced at 23 basis points over the government yield curve a very generous spread for a triple-A borrower and sold rapidly. On August 24, GECC launched a e300 million two-year deal, also led by Paribas. This was particularly impressive given the financial markets at the time. Then at the beginning of September, at the height of the crisis, it got $750 million away, increased twice from an original $450 million at launch. GECC was said to defy logic with this deal. It was the only corporate issuer that managed to launch a deal since July so the increased size was remarkable.
It pleased investors by paying levels that they found more than acceptable 70bp over treasuries or Libor flat, rather than insisting on its Libor minus target. Its launch was necessarily thoughtful: it waited until a certain amount of bookbuilding had been done and waited for clear demand for the paper before it increased the amount.
This cautiousness and the concession on pricing levels from a triple-A borrower was appreciated by the international investor community and will likely be remembered in the more bullish months to come.
GECC has better than average relations with its bookrunners as well. “Other borrowers are obsessed with getting 100% consensus and then are extremely competitive in giving a mandate. The banks tell the borrower what the borrower wants to hear. GECC are responsive to what the lead banks are advising them to do,” says Ovenden.
Alex Mathias
