When Dutch telecoms company KPN did a e2.1 billion combined simultaneous tender and exchange in July, joint lead managed by Deutsche Bank and Bank of America, it was one of Europe’s most complex liability management deals.
KPN wanted to extend its maturity profile and lock in low interest rates. It wanted to clean up its short-dated liabilities and, in particular, reduce the outstanding on its e1.5 billion 3.5% convertible bond due in 2005 and its guilder bond due in 2006.
It was decided that KPN would finance the tender with new bonds. ?One of the reasons for tender and refinancing, rather than one big exchange, was because they wanted to clean up guilder and short-dated convertible issues and we knew that these investors wouldn’t necessarily be able to switch into straight bonds,? says Ian Harjette, head of European high-grade debt syndicate at Bank of America.
It was going to be a large-scale refinancing, given the size of the outstanding 2005 and 2006 maturities, and KPN didn’t want to issue one new jumbo bond and create another large spike in its maturity profile. As the best new maturities for the company were five and seven years, it decided to issue one of each to finance the tender. There was also strong investor demand for a floating-rate note, so KPN decided to issue five-year floating-rate bonds and seven-year fixed-rate bonds.
However, it also decided to offer holders of its 7.25% e2 billion 2006 bonds the chance to exchange them for the new 2011 securities. The 2011 bond would be reopened and increased, depending on how strong investor interest was in the exchange. So the transaction involved a tender on two different bonds, a concurrent exchange on another and two new securities to finance the whole process.
So on July 12, KPN priced two new securities: a e700 million new floating-rate note due 2009 and a e325 million fixed-rate bond due 2011. The FRN offered a coupon of 40bp over three-month Euribor and the seven-year bonds 4.5%.
Strict timetable
This enabled KPN to buy back 36% of its 6.5% guilder notes due in April 2006 and 71% of its 3.5% convertible bonds due in 2005. The following Friday, the 2011 fixed-rate bond was reopened and increased to e1.425 billion because of the extremely strong participation in the exchange offer for the 7.25% 2006 bonds.
The company could have done a much larger floating-rate transaction, given investor demand, but wanted to keep to its 70% fixed, 30% floating debt target, as the company has a lot of fixed-rate assets.
?It was quite complicated for investors but the biggest challenge is always making sure that the market knows what you are doing,? says Christoph Seibel, vice-president, debt capital markets at Bank of America. ?KPN issued new bonds to finance the tender and then reopened this issue a few days later to finance the exchange, but since we predefined the timeline of how this was going to happen, it allowed investors to get comfortable.?
KPN’s deal and German utility RWE’s the same week were the first simultaneous exchange and tenders in Europe, says Sandra Hughes, head of liability management for Europe and Asia at Deutsche Bank. Seibel says this was important to assess how much new debt was needed. ?KPN wanted to extend maturities and lock in current rates, but it didn’t want to increase overall debt. The transactions were done simultaneously so at settlement the only new debt the company had was the premium on the tender.?
