Best borrowers 2007: Best corporate borrower: Linde

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Improving credit stories have been hard to come by in the investment-grade corporate market but the German group proved to be an outstanding exception.

Euromoney’s borrower awards 2007
Overall awards
Best sovereign/supranational/agency borrowerBest bank borrower
Best insurance borrowerBest ABS
Best CDO borrowerBest covered bond issuer
Best corporate borrowerBest high-yield/leveraged finance borrower
Latin America regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Central & Eastern Europe regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Asia regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Middle East and northern Africa regional awards
Best borrower

Erhard Wehlen, Linde

"This is something that can only happen once in the life of a treasurer – that you can bring so many new features!"
Erhard Wehlen, Linde

Linde tapped debt, equity and loan markets in one of the key strategic financings to take place in the past 12 months.

The German group is one of the world’s largest industrial gases and engineering companies, with more than 50,000 employees operating in 70 countries. Its acquisition of BOC triggered a significant financing requirement, which in addition to the direct cost of acquiring the UK company for £12 billion ($23.8 billion), included €1.3 billion for pensions and debts. In addition, Linde has a Eurobond coming due in June 2007. So it put together a financing package split into €1.8 billion of equity, €1 billion in hybrid capital, and some €12.1 billion in bonds, loans and disposals.

This deal was notable for a number of reasons. First, the hybrid was a key component of Linde’s acquisition financing. Hybrids are non-dilutive capital and give corporates scope to bolster their balance sheets. It was the first sterling-denominated hybrid, with a £250 million 60-year non-callable for 10 years alongside a €700 million 60-non-call 10-year tranche. At the time of launch it was the largest in size and tightest in terms of spread for any hybrid with an implicit sub-investment grade rating – Ba1 and BB, two notches below its expected senior rankings.

"We realized we should get a BBB– rating from S&P and Baa2 from Moody’s – that is what our internal calculations showed and which was later confirmed by the agencies," says Erhard Wehlen, group treasurer of Linde.

Linde’s senior ratings at the time of issue of the hybrid were A3/BBB+ but on creditwatch negative/review for downgrade, with the expectation of a two-notch downgrade in each case. Linde was cut to the Baa2/BBB– level last autumn before being upgraded one notch by both agencies just recently.

Linde was one of the very first issuers of corporate hybrids, in 2003. It was the first to return to the market, providing further evidence that hybrids are a viable corporate finance tool. Linde management wanted to clear the decks and raise the equity and hybrid capital components early on so that it could get on with the key job of integrating BOC and managing the sale of 12 companies. Of course this left a small possibility that it would be left overcapitalized should the deal not close.

"If the acquisition had failed we would have had the chance to call the hybrid deal," says Wehlen. "We also have a conversion event which refers to our convertible outstanding. If it converts by more than 80% we have the right to withdraw the euro hybrid tranche. We also have a capital event, a call right for Linde in the unlikely event that we do not get the equity treatment from the rating agencies any more. So there were three new features that the market has not seen before.

"We were also the first issuer of a dual-currency hybrid deal, alongside a parallel equity offering, and we opened the corporate sterling hybrid market. This is something that can only happen once in the life of a treasurer – that you can bring so many new features! Here our treasury team has done an outstanding good job".

The deal was structured to achieve 50% equity credit for Linde with S&P and an equivalent amount of equity with Moody’s (Basket C). The first Linde hybrid had been Basket B.

The key financing was, of course, the initial M&A loan financing. This was for €15 billion equivalent in total – with a £8.9 billion and €2 billion currency split. The underwriters were Commerzbank, Deutsche Bank, Dresdner Kleinwort and Morgan Stanley, with arranger RBS. As is the case with most M&A financings, pricing reflected its strategic nature – so the spreads were attractive. An order book that was €6 billion oversubscribed reflected both the pricing but also a belief that the company could retain its investment grade.

"In the meantime we have been very successful in our disposal strategy," says Wehlen. "In March of this year both agencies increased Linde’s rating by one notch."

Linde is now rated Baa1/BBB. It promptly used the positive momentum from the upgrade to issue a €2.4 billion equivalent dual-currency deal. This consisted of €1 billion five-year and €1 billion 10-year deals via Commerzbank, Deutsche, Morgan Stanley, and UniCredit, and a £300 million 16-year deal via Deutsche and HSBC.

Before Linde embarked on this senior unsecured transaction it settled important factors such as updating its EMTN programme to include a change-of-control clause. The spectre of leveraged buyout has hung heavily over the corporate bond market in recent years and the company’s passage was much easier because of this covenant. The firm re-entered the market having transformed its credit story as a pure play on the industrial gases sector.