United Utilities
The UK company’s investor education programme has paid dividends
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Fallon: Important to be known across the major bond markets |
With the five-year pricing reviews limiting debt issuance in the UK utility sector for most of 2004, it was no surprise to see United Utilities come to the market in force this year. In the first six weeks of 2005, United Utilities Water, a subsidiary of United Utilities, issued two opportunistic bonds in the euro and sterling markets. Both deals were impeccably timed and their success can largely be attributed to the company’s dedicated investor education programme. “The company has been very committed to educating investors on not only its own credit but the UK water sector in general,” says Robert Ritchie, head of UK corporate debt origination at UBS. “It gives them a massive competitive advantage when it comes to the markets, as investors are well acquainted with their credit story.” United Utilities has some of the most challenging capital expenditure requirements, so giving investors time to do their research is high on its agenda. “We operate a number of non-deal roadshows through out the year across Europe, the UK and the US,” says Tom Fallon, treasurer at United Utilities. “With the enormous amount of financing we have, it’s very important to be known across all three major bond markets.”
This has certainly paid off as there was a very quick response to its €500 million, 15-year bond issued in January. Deutsche Bank was the sole lead manager and despite the aggressive price guidance of 40bp over mid swaps, the issue was oversubscribed within an hour, and ultimately had an order book of almost €1 billion. “We had a high-quality order book after an hour and a half, and we managed to keep the quality there and bring the spread talk in to 38bp,” says Jamie Stuart, director of debt capital markets at Deutsche Bank. “With an average 50% allocation we saw some investors looking to buy in the secondary market as the deal freed.”
Even though United Utilities had no immediate need for money, the market conditions were too favourable to miss out on. It was an opportunistic issue but it continues to outperform other comparables in the market.
Its £200 million ($365 million) 2035 issue in February also captured substantial investor interest. The initial transaction size of £150 million started off with price talk of 75bp to 77bp over gilts but was quickly increased to £200 million and priced at 73bp over. Despite this change very few orders fell away. “We had 70 investors on the book, which isn’t normal,” says UBS’s Ritchie. “There was a lot of interest from hedge funds and UK institutional investors but we kept allocation to hedge funds to around 10% so that UK investors could hold the core of the bond.”
United Utilities is not a favourite in the sterling market because of the lack of covenants in its bonds but there are valid reasons for this. The company started its debt programme in 1998 in the US market, so it carried those terms over to its MTN programme in the euro and sterling markets. “The covenant package is the same for all three markets,” says Fallon. “It’s important not to betray existing investors by offering new investors different covenant packages.”
Any investor preoccupation with its covenant language didn’t seem to show, as the deal was eight times oversubscribed. The 2035 maturity was also a clever choice as there are limited corporate bonds in that maturity. “United Utilities always seems to hit the markets at the right time even though it’s not desperate to raise capital,” says Geoff Knight, director of fixed income at RBC Capital Markets. “It’s a knack some borrowers have and others don’t.”
The company has a capital expenditure plan of £3.5billion and as well as financing the growth of its business, it has to refinance its maturing bonds and loans. These two deals so far this year formed part of what could be as much as £2.3 billion in DCM issuance for United Utilities over the next five years. “It’s well ahead of its schedule this year which is a great position to be in,” adds RBC’s Knight. “If the credit markets become volatile and not very welcoming, United Utilities can sit tight until it sees another opportunity to come to the market.”
United Utilities has demonstrated its borrowing abilities in all three major bond markets. “Looking back with hindsight, if I had to choose two dates with which to go to the market, they would be exactly the same,” adds Fallon.
