North America
Best sub-sovereign borrower
California
Best corporate high-grade borrower
GE/GE Capital
Best financial sector borrower
Principal Financial
Best corporate high-yield issuer
NRG
The high-yield bond market has been tearing along for all but the last few weeks of the past 18 months or so, with high levels of issuance and spreads tightening. As a result, issuers have had the upper hand. Several have come out with well-structured and well-timed deals, but NRG wins this year’s North America award for its December financing package, which restructured the company’s debts, freed up cashflow and secured its exit from bankruptcy just seven months after going into Chapter 11.
NRG is a merchant power company that built itself up during the 1990s by acquiring other companies and funding most of its expansion with debt. When the energy industry hit a downturn from the end of 2000 the company was plunged into financial difficulties, was downgraded and then in May 2003 filed for bankruptcy.
It had $6.5 billion in unsecured debt at the holding company, and a further $4.2 billion of project-level debt. What’s more, Xcel Energy wanted to liquidate its position in NRG ? NRG was, in its words, an ?indirect subsidiary? of Xcel.
?They had three large needs to be satisfied in their restructuring,? says Jim Bartlett, managing director at CSFB and relationship manager for NRG.
?First, they had to restructure the debt at the holding company. Second, they had three large subsidiaries which generated much of the cashflow but also had a lot of the debt, so the company wasn’t seeing any of the cash. And finally, they needed credit facilities for their trading and marketing franchise since they were no longer an investment-grade company.?
One of the first steps was to liaise with the rating agencies. Second, says Bartlett, ?since merchant power was still a naughty word we had to get investors comfortable with the collateral package. That involved digging down deep on the collateral and portfolio analysis to convince investors that the operating company would hold together and wouldn’t just be a band aid solution.?
The total financing package was $2.7 billion, increased from $2.2 billion, and was split between $1.45 billion of loans rated B1/BB?, and $1.25 billion of senior secured notes with a B2/B+ rating. Also, as part of the restructuring, Xcel paid $752 million in cash to NRG to decouple the two companies.
Investors in the holding company debt received 50 cents on the dollar, distributed in three ways. First, they received some cash, with NRG using up to $540 million of the cash from Xcel; second, they received $500 million of senior unsecured notes that were then converted to cash when the exit financing was increased in size; and third, the creditors received 100% of the new common stock in NRG, 100 million shares.
In total, NRG eliminated more than $6 billion in debt, including the $1.7 billion in project debt held at three of its subsidiaries that had created a cash trap for the company once it had been downgraded to junk status.
Just 17 days after the exit financing was completed NRG returned to the debt markets in early January with a $450 million deal. ?The high-yield market had been on such a tear,? says Bartlett. ?And there was a stipulation in the exit financing strategy that a percentage of the company’s debt be fixed rate to act as a hedge to the bank debt. With high yield so attractive we decided that the company would be best off issuing more debt to pay down some of the bank lines.?
The deal was for $475 million, and was completed in an hour.
Best securitization borrower
Capital One
Capital One stormed back into asset-backed securities investors’ good books in 2003 and early 2004, a recovery characterized by the rapidly improving spreads on its new ABS deals.
The credit card and finance company did not have the best of years in 2002. It wasn’t alone, of course. It was the year of corporate scandals in the US, and even a whiff of one had the potential to destroy a company, or at least its independence.
Capital One’s problem was that it had grown too big too fast in the sub-prime credit card sector, which was now looking shaky thanks to the poor economic climate. It had also not kept investors or regulators abreast of just how large a proportion of its portfolio ? 33% ? it was.
Investors were not happy: it looked as if yet another credit card company was going to land them in trouble, just months after Providian, Metris and NexCard had caused concern.
Regulators weren’t best pleased either, forcing the bank to sign a memorandum of understanding to deal with regulators’ concerns: its high-growth strategy and substandard risk-management procedures.
A screaming violation The stock tanked, its default swap prices gapped out to above 900 basis points, and in October it brought an asset-backed securities deal that surprised and angered many. The $150 million triple B tranche of an otherwise pretty normal $1.6 billion deal was priced at 275bp over Libor, a price that one ABS banker dubbed ?a screaming violation?. Yes, Capital One was having troubles, but to pay 150bp more than its competitors in an asset-backed deal seemed unjustifiable: ?One of the beliefs we’ve tried to hammer home is that collateral value differences are taken into account when structuring a deal,? says the banker. In other words, all triple B credit card ABS deals ought to price close to each other.
Capital One didn’t return to the market for six months. When it did, it had to pay up again; the spread on its triple-A deal was 39bp over Libor, triple the 12bp over Libor MBNA had paid the day before. But it was the start of the company’s rehabilitation, and it was keen to play that up. The tombstone for the deal was a mock-up of the film Matrix Reloaded, in this case entitled Capital One Reloaded, with three of its executives clad in black and beaming bright smiles at the camera.
Two factors helped the company’s rehabilitation. First, it had embarked on a campaign to be much more open with investors about the state of its portfolio, what losses would look like in 2003, and the direction of its businesses, which was to be much more focused on prime and superprime credit card holders as well as diversifying into other areas such as auto finance.
?What really made an impact was their debt and equity conference in October 2002,? says Kristina Clark, debt analyst at Wachovia. ?They laid out step by step what their asset quality would look like, what they expected their losses to be and why, as well as their plan for becoming a more normalized financial institution. It was a framework for redemption for many investors.?
Their predictions came out pretty much as they had laid out, which gave investors greater comfort in Capital One’s processes.
The second factor was that the company continued to crank out good earnings, though there have been questions about just how much of their earnings should have counted as core earnings, and how much was derived from earnings management, such as reducing loan-loss reserves more aggressively than some of its peers.
But the overall progress, coupled with a fixed-income bull market since late 2002, has helped to restore investor trust in Capital One and get its ABS deals back on a par with its competitors’.
Each deal done over the course of 2003 and 2004 came at tighter spreads, culminating in a JPMorgan-led triple B deal in February this year that came at 105bp over Libor, and a single A deal in early March led by CSFB that came at 22bp over Libor, 17bp tighter than the triple-A recovery deal done 11 months earlier.
