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Deutsche Bank GECC GlaxoSmithKline EEB/TGI Bank of America |
If someone were to suggest going to the bond markets for the biggest ever corporate deal outside of the telecoms industry in the midst of the worst financial crisis for decades that is growing almost daily, that person would have been assigned close supervision. If that same person were to propose marketing such a deal with just a single investor conference call, he might well have been forcibly restrained. But UK pharmaceuticals company GlaxoSmithKline did just that with its $9 billion equivalent yankee issue on May 6. Launched to fund a share buyback programme that was ramped up to £12 billion at the credit bull market’s 11th hour in July 2007, the four-tranche deal racked up a $17.8 billion order book in less than four hours. It was split into: 6.375% $2.75 billion due 2038, 5.65% $2.75 billion due 2018, 4.85% $2.5 billion due 2013 and a $1 billion FRN yielding three-month Libor plus 62.5 basis points, due 2010.
Among the records it sent tumbling were those for the largest corporate yankee issue since 2000 and the largest corporate issue anywhere since 2001. The success of the deal was rendered even more impressive by the fact that GSK’s rating was recently downgraded a couple of notches, to A1 (Moody’s) and A+ (Standard & Poor’s), because of the higher debt requirement specifically for its large share buy back programme. “A debt-financed increase in a company share buyback programme will often place downward pressure on its credit profile and depending on the size of the increase, on its ratings,” says Morven Jones, head of European corporate DCM at Lehman Brothers, which led the transaction along with JPMorgan and Citi. “As a result, it’s important to give investors a lot of clarity around the company’s credit story, particularly on the capital structure and credit ratings.” GSK did that with a single investor conference call presented by CFO Julian Heslop. Not holding any one-on-one investor discussions did not hold back the orders, though, and the eventual figure of $9 billion was far more than the company had originally intended to ask for. “We went on screens with $6 billion, and had in mind between $6 billion and $8 billion,” says Sarah-Jane Chilver-Stainer, treasurer at GSK. “But we felt that the order book was so strong, so high quality and so large that we wanted to take advantage of that.” The extra billion was accounted for by the two-year floating-rate tranche.
All in the timing
GSK planned £6 billion of share buybacks this year. Going to the markets with the intention of taking between $6 billion and $8 billion in one visit was a sizeable challenge, which might not have been answered so resoundingly had GSK not been under a funding blackout in April. GSK had begun the issuance process in March, but the lengthy documentation procedures in the US pushed the deal to the end of that month, and, because of the company’s policy of not funding in its close period, the deal was postponed until the beginning of May. The glut of successful issuance into the US investment-grade market in April was undoubtedly of benefit to the deal, and it is likely that its success would have been significantly reduced had GSK issued as soon as it was ready to.
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“We felt that the order book was so strong, so high quality and so large that we wanted to take advantage of that” |
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Still, as a blue chip, non-cyclical, corporate credit, GSK could expect strong interest at any time. When issuing in such size, a lot of investors are compelled to get involved with a borrower of this quality. Many, especially in the US – which accounted for about 80% of the order book – manage their performance according to the bond indices, and not buying the very large deals can result in a tracking error, providing an extra incentive. It set the tone for European corporates in December with a €3.5 billion benchmark. At a time when many borrowers were holding off in the hope that the situation would shortly improve, GSK decided that given its increased funding requirement, and not wanting to be caught in a likely surge of supply if and when the markets did improve, it was prudent to raise funds sooner rather than later. A €6 billion order book showed the wisdom of this strategy, and GSK has now also shown what can be done in the US. Two days after launching the $9 billion deal, the notes were trading tighter in the secondary market, the 10-year and 30-year tranches by 5bp to 6bp, and the five-year tranche by 8bp to 10bp.
The company will issue more deals of benchmark size this year but has not yet decided which market to tap next. But thanks to the success of May’s deal, the next one has become that much easier. “Glaxo came in, priced a $9 billion transaction, generated a $17 billion order book, and got it all done between 8.30am and 4pm,” says Lehman’s Jones. “That’s a tremendous achievement, and tells you a lot about their market timing and the meticulous preparation they put in to allow such a smooth execution on the day.”
