Best Corporate Borrowers

Latin America: CVRD

Minerals conglomerate Companhia Vale do Rio Doce (CVRD) has long been regarded as one of the foremost companies in Latin America. It proved that it could leverage that perception into long-dated funds in September, when it became the first Brazilian corporate to issue 10-year debt.

Bank of America Securities, which had the mandate for the deal from CVRD, was cautious at first. It set up a securitization programme based on income from the export of iron ore and pellets to designated customers in Europe, the USA and Asia, and managed to get an investment-grade rating on the structure from Moody’s, Standard&Poor’s and Fitch. Greg Johnson, head of yankee capital markets at Bank of America, notes that S&P’s BBB-rating “was the first time S&P had ever rated a stand-alone trade receiveable deal more than three notches above the sovereign ceiling.”

The obvious next move was to go to MBIA to get a wrap on the deal – a piece of insurance that would bring it all the way up to a triple-A rating. MBIA agreed to wrap up to $200 million at seven years’ maturity, and the sales force got to work.

What they discovered was a surprising depth of demand for both size and maturity. Investors were happy to go out from seven to 10 years, and weren’t asking for any sort of wrap at the longer maturity.

They were even happy with accepting a three-year grace period on the 10-year bonds.

Eventually, CVRD issued $300 million in total: $150 million of unwrapped 10-year bonds at 8.926%, $25 million of unwrapped seven-year bonds at 8.682%, and just $125 million of wrapped seven-year bonds at 65 basis points over Libor.

The baby $25 million seven-year tranche was done to keep as many investors as possible happy, Johnson says: “The only reason we did the 07s unwrapped at all was to be accommodative to those investors who’d done a lot of work. We could have done all of it at the longer maturity. There were some investors who’d done a lot of work and wanted to be in the deal, and they were quite upset when they began to hear that we might do all of it at the longer maturity, because they didn’t want to do the floating wrapped stuff, and they couldn’t go out to 10 years.”

The same philosophy went into the pricing of the triple-A tranche. “Once you’ve delivered the interest, it’s tough to go back to all those investors that you’ve got to work on the deal and say ‘OK, we’re going to squeeze it out to 62.5 [basis points over Libor] so that people drop out,'” says Johnson. “That doesn’t necessarily serve the company well in the long run. The next time they come out with a deal, it could be a really crappy market environment. You want those guys to be there for you.”

The investors split along geographical lines. Europeans – who accounted for just under a third of the 30 total investors – went for the floating-rate triple-A wrapped tranche, while Americans were more interested in the higher yields on the unwrapped notes. CVRD was confident enough to hold its roadshow only in the US. The idea was that if you’re a European buying a wrapped note, you’re more interested in the mechanics of the wrap than you are in the underlying credit.

As it was, there was no shortage of demand. Johnson says that CVRD “could have done close to $450 million or $500 million if we’d pushed it. But this was all of the money the company wanted.”

Asia: Hutchison Whampoa

Hong-Kong based Hutchison Whampoa issued the largest single-tranche corporate bond ever out of Asia in March 2001.







Hutchison: a case of repositioning a credit

Single-A rated Hutchison is among the best corporate credits in Asia and is one of the most reputable borrowers. This prompted some Asian bankers to say that the 10-year $1.5 billion deal, though successful, was not really spectacular.

However, Hutchison was far less well known in the US and Europe where many investors, quite wrongly, associated the name with the telecom sector. From that perspective it was certainly spectacular to bring the new Hutch 10-year at 62 basis points inside British Telecom, and 58bp inside Deutsche Telekom, which both were also rated single-A at the time.

At 187bp over treasuries the deal was also priced inside Hutchison’s own yield curve of outstanding bonds. The lead banks, Goldman Sachs, JP Morgan and Merrill Lynch, reported a $3 billion order book that made it possible to reduce the spread from the initial price talk of 200bp over treasuries. “This was really a case study in repositioning a credit with global investors,” says Richard Stoddard, head of debt capital markets at Merrill Lynch.

To ensure this success, Hutch went on an extensive roadshow to paint the correct picture of the credit. “We explained that Hutch is a very diversified company operating on a global scale,” says Frank Sixt, CFO of Hutchison. “Our telecom business is an important part to our growth story but is of course not our whole story.”

The facts speak for themselves. The turnover from Hutchison’s telecom business amounts to only 12%, compared with 32% from retail and manufacturing and 17% from port services. One-fifth of the company’s assets are in the telecoms sector – the rest of the business being in ports, property, financial services, energy, and retail.

Investors were clearly impressed: 87% of the roadshow participants bought the bonds. Hutchison was particularly pleased about the strong participation of US institutional accounts – 38.2% was sold to the US – because it was the first roadshow there since Hutchison’s last global bond in 1997. “It is very important to us to have re-established ourselves with mainstream US-based investors,” says Sixt.

The borrower and banks had to be flexible. The leads went on the roadshow with plans to issue a 30-year tranche as well and this drew some criticism. One banker says that although the leads “have ultimately made the right decision not to go for the 30-year tranche, they could have known before that there was no demand”.

“The demand for 30-year paper was strong in January as the yield curve once again became positively sloped,” says Stoddard. “But as the book built, it became apparent that investors required a premium for the 30-year that Hutch wasn’t willing to pay.”

Stoddard agrees with Ron Lee, director of capital markets, at Goldman Sachs, that the decision to drop the 30-year tranche reflects a quality that few borrowers can claim – namely willingness to listen to investors. “Hutch pride themselves with being an issuer that can read the markets. They did not increase the size of the 10-year bond nor did they go for the 30-year at higher spreads. Hutch were guided by the right price – which benefits the company as well as investors who have bought into a well-performing and liquid issue,” says Lee.

Fortunately for Hutch it does not need the cash as badly as some other companies. In fact, its net cash position is $9 billion, which is why many observers think that there must be a significant acquisition in the making. This is not so, says Sixt. “With the deal Hutchison simply refinanced an equivalent amount of US dollar short-term bank debt. We also thought it would be wrong to stay out of the debt markets for too long, and the favorable interest rate environment was a great opportunity to come back.”

And this is another of Hutch’s qualities. “Again, the company showed its fantastic ability to know when to enter the market,” says Lee. “The absolute interest rate environment was very favourable after the Fed rate cuts, Asian credit spreads tightened and the general market sentiment was strong.” Hutch issued the 10-year at a coupon of 7%, the lowest any Asian issuer came out with since the Asian crisis.

The company’s market savvyness had also been of immense value last year when it managed to finance the costs of acquiring a UK UMTS licence with a £2.85 billion non-recourse project loan before liquidity in the telecom sector dried up.

Likewise, it sold most of its inherited 5% stake in Vodafone via a $5 billion block trade in March and, when telco shares were trading at the bottom later in the year, it decided to unload the rest via two convertibles. On October 8, 2000 Hutch issued the biggest exchangeable out of Asia – a $3 billion three-year deal – that had a surprising follow-up in January 2001 when another $2.5 billion hit the market.

“While we did not think we would achieve reasonable value for our stake by selling at the prices available at the time, we thought the conversion price of £3.41 and the option premium we received on the deal were quite reasonable,” explains Sixt.

Eastern Europe: TPSA

Polish telecom company TPSA is the best corporate borrower from the region for the third consecutive year, for good reason: it is still investors’ favourite credit. It is the only company that gets its deals done without implicit government support, it offers excellent growth potential and it has been a sophisticated and reliable player in the capital markets ever since its debut in 1998.

This year TPSA earned yet another bonus point by becoming the only European telecom to be upgraded. Moody’s upgraded it from Baa3 to Baa2 in February 2001, and even put it on positive outlook.

“The most important reason for the upgrade had been TPSA’s ability to have maintained its top position in the fixed-line market despite liberalization, and to have increased its share in mobile market despite the fact that its subsidiary, Centertel, received a full licence later then its two main competitors, PTC and Polkomtel,” says Aidan Fisher, senior analyst at Moody’s Investors Service.

TPSA’s strength also stems from the involvement of France Telecom, which will help with marketing and technology advance.

France Telecom bought a 35% stake in November 2000 and has the option to increase this to 51%.

TPSA is very attractive when compared with its struggling, often down-graded western European peers, because funding proceeds will generate far higher returns, says Tomas Dusek, associate, debt capital markets at Deutsche Bank. “The Polish market is well below saturation point in the fixed as well as mobile markets. That means that TPSA invests mainly in high-return infrastructure, and not in the more risky undertaking of building up third generation on top of having paid a hefty licence fee.”

Not that TPSA will miss out on the 3G market. Together with the two other leading Polish telecoms, it acquired a licence in last December’s controversial auction. At 187bp over treasuries the e650 million ($558 million) funding for this did not come cheap, but TPSA can pay two-thirds of the cost over an 18-year period. “Unlike other telcos, TPSA will thus be able to make these payments from the cash flows generated from 3G business,” notes Dusek.

TPSA’s only bond issue this year was a testimony of investors’ confidence in the company’s future. Lead managers Deutsche Bank and SSSB reported an order book of e1.55 billion for the five-year e500 million deal in February. The fact that TPSA was upgraded during the roadshow certainly helped, but it was not at all a sufficient guarantee for success, given that France Telecom got downgraded two days earlier.

“We knew that France Telecom’s downgrade would not affect the pricing of the deal,” says Dusek, “because we had a good roadshow with TPSA. The company went to lengths in explaining its capital expenditure programme, internal management, and how to deal with the forthcoming competition in the domestic and international long-distance markets, which will be fully liberalized soon. Investors really had no doubt about the company, and they could see that the promises made in 1999 had all been delivered.”

With investors’ demand unshaken and a rally of TPSA’s existing bonds in the secondary market, the leads were able to price the deal at 178 basis points over euribor, well below price talk of 180bp to 200bp. The bonds tightened another 3bp at launch and then went on a rollercoaster ride, widening to up to 209bp and tightening again in accordance with general market sentiment. At the time of writing it is trading at 169bp over euribor. This might not be a very compelling performance in absolute terms, but it is the best on offer in the European telecoms market.

In fact, TPSA was the only company that managed to reverse the trend of upward pressure on spreads in February – an achievement that 131 investors from 21 countries duly acknowledged. “Investors consider TPSA as a safe-haven European telecom with good growth potential. TPSA has certainly lost its image of an emerging credit,” says Dusek. “The distribution of the deal was yet again better than the previous year, with many first-time buyers, especially from Scandinavia and Benelux, taking the credit.”

However, investors will have to look out for a new darling corporate because TPSA’s net funding needs will peak next year, and visits to the capital markets are likely to dry up.

Commended: Elektrownia Turow

Elektrownia Turow, a BB-rated Polish power generator, stunned observers with a debut bond that not only raised 10-year money – the longest maturity ever raised by a Polish corporate – but that was increased in size by one-third. The company, which needed the money to refinance its short-dated bank debt and for modernization, was delighted, and so were investors, who have watched spreads tighten by 50 basis points since March.







Poland modernizes its power sector so it can compete within the EU

In fact the deal was so well received that there had hardly been any trading at all. They key to such success, say the lead-managers, UBS Warburg and SSSB, was an innovative structure and thorough marketing.

“This was not the sort of deal that sold itself, the story had to be told,” says Aidan Freyne, managing director at the fixed-income syndicate at SSSB. The main concern of investors was that Turow, Poland’s fifth-largest generator, finds itself in the middle of the deregulation process of Poland’s energy market, and with entry into the EU it will have to compete with foreign energy suppliers.

The bankers explained that this is far from worrying. “Poland wants its power plants to become efficient and competitive,” says Freyne. “The government has therefore implemented a very sophisticated, well-organized programme whereby the whole power sector will be modernized in different phases, taking into account the needs of various important generating assets. State-owned Turow is of particular strategic interest, being the only generator in its region and the first to embark on a modernization plan with the support of the government.”

The government’s commitment to the sector is reflected by the establishment of long-term power purchase agreements (PPAs) since 1994, which were designed to provide power generators with long-term cashflow stability to finance their modernization programmes. Under such a PPA Turow’s long-term revenues are guaranteed until 2017. A state-owned grid company will purchase energy from Turow at prices that will cover all of Turow’s costs, including debt servicing resulting from the modernization-related borrowing. Turow’s debt service is thus effectively underwritten by the Polish government.

The PPA was crucial in putting investors at ease, but it also provided the main structuring problem. The receivables under the PPA already acted as security for Turow’s bank debt, and were thus in the way of a straightforward securitization. There was not enough security left for bondholders – 92% of Turow’s receivables had already been assigned to bank lenders.

“It was clear from the start that it would only be possible to attract bond investors if they were pari passu with the banks in the security package,” says Tim Kennedy, director, capital markets at UBS Warburg. Turow could convince bank lenders that it was in their interest to share the right to Turow’s revenue with bondholders. After all, its quite a traditional approach that banks prefer a bond to be issued before committing more funding for the last phase of modernization.

The leads made sure that the legal framework was waterproof and that default for the bond issue was defined in the same way as on the banks’ documentation.

Extra security was given to bondholders by adding to the definition of default any changes in the nature of the PPA. The bonds even include a put option allowing holders to return them to Turow if the Polish government ceases to own a majority stake in the company.

Every individual bondholder can exercise this option if not satisfied with the new owners.

“The deal is as close to a securitization as one could get under the given limitations,” says Kennedy. “It was the first time that a bond structure was implemented within existing credit arrangements.”

Investors felt it was a genuine, safe structure, and considered Turow to be quasi-government credit, that is triple-B, given the strong government support through its 100% ownership and the PPA.

Demand was so strong that the deal was increased in size from e200 million to e270 million ($231.5 million).

However, the rating agencies were less enthusiastic. By rating the deal at double-B, Fitch and Standard&Poor’s took a conservative approach and disregarded the implicit government support which, though impossible to quantify, is often accounted for in other transactions.

This divergence between the rating agencies’ and the bondholders’ view was the main driver of the spectacular tightening from 499 basis points over Bunds at launch to 450bp over.

Investors will probably not have to wait long for more deals like this. In Poland, 70% of the power sector operates through similar PPAs, putting estimates at e15 billion in investments that can be financed in the way Turow did. “Turow’s deal has led the way for other major power plants to come to access the international bond,” says Kennedy who expects another issue to be completed by the end of this year.

US: AOL Time Warner

When AOL and Time Warner announced their merger in January last year, it was widely regarded as symbol of the ascendancy of the internet age over the old media.







AOL Time Warner has set new benchmarks

A little over a year later, it was Time Warner’s brand name and cash-generating businesses that allowed for the merged entity to borrow a large amount in a short space of time.

This April, AOL Time Warner tapped both the debt and loan markets, raising a total of $9 billion – $5 billion with a syndicated loan, the rest in the bond market. The $4 billion bond deal involved three separate tranches of five-year, 10-year and 30-year bonds. The first benchmark deal for the newly enlarged AOL Time Warner group deal – Time Warner had issued before the merger – was seized on as a liquid benchmark for the entire media sector as well as for the company itself.

The deals were a mixture of opportunism, good timing, and an understanding of market sentiment. This was characterized by the $2 billion 30-year tranche of the bond deal. It tapped a part of the market which on the supply side was suffering from the decrease in US treasury issuance. The buy side, on the other hand, especially insurance investors, had stayed out of longer-term paper because the yield curve had been inverted for most of the last 12 months: two- to five-year paper was preferred for most of 2000. Now in mid-April, investors were keen to extend duration and there was very strong demand for all tranches but especially the 30-year.

The deal was rounded off with two $1 billion tranches, one with a five-year, one with a 10-year maturity. What had first been conceived of as a $3 billion issue was raised to $4 billion. It seemed that cash had been building up in bond investors accounts and many of these saw the best opportunity to put this to work in sizeable amounts coming in the primary market. Investors subscribed for over $12 billion worth of AOL Time Warner bonds across all three tranches.

Such demand enabled the company to re-position its bonds as against outstanding Time Warner paper which had been trading in the secondary market at almost 200bp over treasuries. It’s rare for any borrower to price a new deal inside its outstanding secondary paper, but the lead managers were able to price the new 30-year bonds 2-3bp inside secondary levels.

best borrowers of 2001

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