Western Europe | Emerging Europe | Asia | North America
Best sovereign bond
Brazil
Type of deal: 43-month bond
Deal size: $1 billion
Date: April 2003
Advisers: UBS Warburg, Merrill Lynch
Latin debt had a banner year in 2003 and there’s no doubt which deal set the ball rolling. When Brazil issued its $1 billion 2007 bond at the end of April, it set the tone for the entire year.
The bond was a blowout: the leads received $7.3 billion in orders from 427 different participants in just 90 minutes. Of these would-be investors, 89 went away empty-handed, with no bonds at all. When they looked to other parts of Brazil’s curve to try to pick up debt on the secondary market, they found something astonishing: far from widening in response to the $1 billion of new supply, the entire curve had tightened in by about 25 basis points overnight.
The maturity of the bond was unusual. At three years and seven months, it was very short-dated for a large sovereign issuance, and didn’t mature in the normal multiple of one year. Also unusual were the collective action clauses that Brazil included in the bond: at 85%, they were 10 percentage points higher than the 75% that the markets had seemed to accept as standard.
Both moves were designed to ensure that Brazil’s first bond issue with Lula as president would be warmly received. Its enormous success showed that neither was strictly necessary, but Brazil was adamant that it would take no chances. And if this bond had the effect it was meant to, future issuance would be a lot cheaper.
In the end, the bond priced 5bp through the tight end of price talk, at 10.7%, or 783bp over treasuries. That was the tightest Brazil had traded all year, and wider than it would trade again. It was a great deal, opening the floodgates for a big year of sovereign and corporate issuance. S&P upgraded its outlook on the country to stable from negative on the same day that the bond was launched. Brazil was back on the international capital markets map.
Felix Salmon
Best Project finance deal
Autopista Central
Type of deal: 23-year bond
Deal size: $618 million
Date: December 2003
Advisers: Citigroup
Latin American project finance in 2003 was dominated by Chilean toll roads. Every major investment bank has a Chilean toll road deal it is proud of, but the one that Citigroup led for Autopista Central, a concession company operating a 60km toll road in Santiago, was exceptionally good.
It was the largest-ever infrastructure financing in Chile and also the largest bond ever issued in UF – the inflation-linked version of the Chilean peso that the Chilean government has been pushing as an investment vehicle for domestic pension funds. The deal was so huge that even though the Chilean tranche was the largest ever seen, a simultaneous dollar tranche had to be added, at $250 million. The deal was also structured without the government guarantees that had limited the size of other toll road deals.
The simultaneous tranches were the trickiest part of the deal to structure. The documentation is inches think, mainly in an attempt to ensure that there was no possible way that one group of bondholders might ever be disadvantaged relative to the other. Pricing and placing both bonds on the same day was also a tricky business.
The deal also carries a variable reserve account. In most project finance deals, the guarantors (in this case, MBIA) ask the sponsors to put up a large sum in case it is needed. In this case, that sum changes according to cashflow coverages. Even so, the structure of the deal was strong enough to get it a stand-alone BBB- investment-grade rating, which was then wrapped by MBIA to AAA. In the end, the bonds came with a 23-year maturity, an 18-year average life, and principal payments not starting until 2010. By then, the first free-flow electronic toll collection system in Latin America should have been up and running for three years.
FS
Best corporate debt restructuring
Banco Hipotecario
Deal size: $1.2 billion
Date: December 2003
Adviser: Citigroup, ABN Amro
Banco Hipotecario, a mortgage bank that was an innocent victim of the economic collapse in Argentina, managed to complete the largest private-sector corporate restructuring in the country to date in December. There were $300 million in loans as well as $940 million in bonds – largely held by Italian retail investors.
Banco Hipotecario’s problem was that of most Argentine companies: its debts were in dollars and its assets in pesos. On August 19, it launched its offer. The bank’s debt had been trading in the mid-30s until that point; when the offer was made, it was in the low 40s. With an exit yield of around 14%, the offer would value the debt in the high 50s, so it was pretty attractive on a net present value basis.
Creditors had three choices. They could keep the face value of their debt, and enter into a par-for-par exchange, accepting new bonds that mature in 2013, with a 3% coupon stepping up, eventually, to 6%. Alternatively, they could take a 30% haircut, and swap into a new 2010 bond that is secured by Argentina’s Boden government bonds. A third choice was to take 50 cents in cash.
The tough part of the exchange was in Italy. There were so many creditors – about 8,000 individuals using over 100 Italian banks – that the offer needed to be registered there.
No-one had ever tried such a thing before, but the fact that this deal worked out does go to show that if Argentina puts its mind to it, a successful sovereign restructuring should be possible.
The deal finally closed on December 29. In the end, Citigroup managed to get more than 95% of the bondholders into it.
FS
Best Hybrid security
Bradesco
Type of deal: 10-year wrapped subordinated bond
Deal size: $500 million
Date: October 2003
Adviser: Merrill Lynch
As hopes for the Brazilian economy started picking up over 2003, Bradesco, one of Brazil’s largest banks, decided it needed more equity capital in order to be able to step up lending. It decided to tap the subordinated note market for $300 million. It found so much demand, even at 10 years, that it raised this to $500 million.
To achieve an investment-grade rating, Sovereign Risk Reinsurance Ltd wrapped the note with political risk insurance, getting a Baa1 rating from Moody’s. That enabled Bradesco to issue at a yield of 8.875% – 150 basis points over treasuries, and 97bp through the sovereign. It was the largest tier II transaction ever done by an emerging-markets issuer, and came at the tightest levels that any Brazilian subordinated bank deal had ever seen.
Half of the bonds went to the US; the rest were split pretty evenly between Europe and Latin America. US investors, especially, got a healthy spread pick-up – comparable US paper was trading at about 143bp over treasuries. Bradesco got non-dilutive, tax-deductible equity at a fraction of the cost of issuing shares.
FS
Best M&A deal
Not awarded
Despite record amounts of fixed-income capital flows to Latin America in 2003, M&A activity never took off. Total volumes were little more than half their 2002 level of $44 billion, itself a substantial drop from the $113 billion seen in 2000.
Investment bankers are optimistic that 2004 will see an uptick. After all, bond investors can send money Latin America’s way overnight, whereas M&A deals can take a year or more to complete. But this year, there was no stand-out M&A deal. A bit like economic growth, M&A activity is one of those indicators everybody is hoping is going to perk up just around the corner.
It’s entirely possible. After a rocky few years, Latin America is looking more stable than in a long time. All it needs now is someone with the cash and the ambition to invest.
FS
Best Equity-linked deal
Pemex
Type of deal: seven-year exchangeable bond
Deal size: $1.4 billion
Date: December 2003
Advisers: JPMorgan, Merrill Lynch, UBS The biggest corporate deal in Latin America in 2003 was not a bond, not a loan, not a stock offering, not even an acquisition. It was a convertible bond – the only equity-linked deal by a Latin American issuer over the course of the year, but no less impressive for that.
Latin American equity markets have been weak for a long time, making equity finance extremely expensive. But Mexican state oil company Pemex held a 4.8% stake in Spanish oil company Repsol-YPF that it wanted to monetize. Rather than sell the shares outright, it issued a seven-year bond with a 4.5% coupon that is exchangeable for Repsol shares at a 31% conversion premium. It was the first time that a Latin company had ever issued a bond exchangeable into a European security. The bonds carried an investment-grade rating of Baa1 from Moody’s and BBB– from Standard & Poor’s.
The deal closed within four hours and was heavily oversubscribed. More impressive, however, was the fact that Repsol shares closed down only 0.6% on the day, despite the fact that essentially 5% of the Spanish company was being sold. Convertible bonds are generally bought by arbitrageurs who short the underlying stock, but in this case the deal went off pretty smoothly.
FS
Best high-yield bond
Petrobras
Type of deal: 10-year bond
Deal size: $500 million
Date: June 2003
Advisers: Deutsche Bank, Bear Stearns
Just two months after Brazil had come back to the international capital markets, state-owned oil company Petrobras stormed out of the gates with a much longer, much bolder issue. This has received effusive praise from the type of bankers who would usually rather give up a mandate than say something nice about a rival’s issue.
Petrobras had several innovative and interesting deals in 2003, but its 10-year bond in June was the one that everybody remembers. In previous years, it had issued a lot of debt wrapped up in political risk insurance and other structures that served to reassure investors that it would meet its obligations. This bond, by contrast – the first since a leftist government had come to power and taken control of the company – was plain vanilla, with no wraps or guarantees.
And despite the Brazilian government’s having no plans to divest its controlling share in Petrobras, the company managed to raise funds at 175 basis points through the sovereign curve.
The trick was that the bond was marketed to high-yield and high-grade investors in the US, not to emerging-market investors. Petrobras is a huge and extremely strong company, and offers a hefty yield pick-up over comparably rated companies in the US, which are invariably smaller and weaker. In the end, high-yield accounts made up 50% of total allocations, effectively setting the bond price.
