2001: Glas Cymru’s £1.92bn bond: foundation of secured bonds/WBS

IFR 2000 issue Supplement
5 min read
Anil Mayre

In the flow - Glas Cymru’s £1.92bn whole business securitisation from 2001 was a complicated animal, mixing wrapped and unwrapped, conventional and index-linked bonds (both LPI and CPI) – all timed to take out an acquisition financing with a sterling bond deal unprecedented in size. It was a journey into uncharted waters, but it worked to drive utility financing to a new level.

Glas Cymru’s £1.92bn whole business securitisation from 2001 was a complicated animal, mixing wrapped and unwrapped, conventional and index-linked bonds (both LPI and CPI) – all timed to take out an acquisition financing with a sterling bond deal unprecedented in size. It was a journey into uncharted waters, but it worked to drive utility financing to a new level.

The package stemmed from Hyder looking to offload the water utility part of Welsh Water. Glas Cymru acquired it through Dwr Cymru using a bridging loan from Citigroup and RBS. This was refinanced by the WBS secured by the company’s assets.

The issue’s legacy is just as impressive as its structure, providing a template for other whole business structures and acquisition financings.

“It was a real David and Goliath situation,” said Chris Jones, who was finance director of Dwr Cymru at the time and who was about to become chief executive. “There were just two of us, myself and Nigel Annett [executive director] looking to take control of a large and very important business, which had already been subject to one takeover in the recent past and which was not able to invest as it needed to for the benefit of its customers because of the ongoing uncertainty about its future.”

The decision to finance the acquisition through debt brought significant advantages.

“The key thing is that it was the first large transaction which relied on an analysis of a regulatory framework to support the credit. Consequently, a radically different financing structure was possible to allow Glas Cymru to purchase Welsh Water in a competitive situation funded entirely through debt,” said Richard Bartlett, part of the team involved at RBS and now the bank’s head of corporate DCM and risk solutions, EMEA.

The regulated asset value had not been considered to such a degree in previous financings, but this deal changed market convention. “Now every regulated transaction is structured in the context of RAV,” said Bartlett.

Numerous deals have borrowed Glas Cymru’s WBS technology. Through covenant packages, companies have increased gearing, cut capital costs, extended duration, boosted debt ratings and calmed investors through incentivised payments such as cash sweeps to pay down debt.

“For the broader market, it was the first in a series of such transaction structures, initially in the water industry and latterly in aviation and gas, which have seen major companies financed on the back of a regulatory framework. It was completely radical then but is now an established part of the sterling market,” said Bartlett.

The deal took some explaining in a dotcom-obsessed environment, with 85 one-on-one meetings. But it was time well spent.

“At the time, infrastructure was out of favour, as everyone was focused on the tech sector. But we had a secure income stream and solid RAV and received orders of around £3.5bn for the £1.9bn we needed to raise,” said Jones.

Funding solely through debt suited the company’s structure, with no risk of tension with equity holders.

“The company had stable cashflow, which allowed it to support that amount of debt issued. It made sense versus equity financing. No-one had introduced the concept of leveraging a company at that level with such duration. It was the right capital structure for this type of company,” said David Basra, who worked on the deal for Citigroup and has gone on to become the bank’s head of EMEA debt financing.

Pubs had issued secured debt before, but they were more based on real estate asset finance. This issue “went a step further than the pub concept. It blew the cover off it by using the entire asset base and operations of that company”, said Basra.

The deal initiated a momentum shift in gearing levels, valuations and cost of capital for the sector. Structuring trades to achieve high investment-grade ratings has not only saved companies money but also increased investor confidence in them through sturdy capital structures and covenants.

The deal was priced at a relatively small discount to RAV (around 93%), but companies have since achieved healthy premiums. The Borealis offer for Severn Trent, for example, was 130% RAV.

“It turned the utility sector from [a sector with] lazy balance sheets to something that could be levered up,” said David Dubin, presently head of EMEA infrastructure and project finance at Citigroup, but then co-head of the European business of MBIA, which wrapped £1bn of the deal.

And customers continue to benefit from a structure implemented a dozen years ago. “We have returned around £200m through dividends and rebates. It has worked out better than we expected. It’s amazing how it has become a template for utility financing,” said Jones.