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Tuesday, 12 December 2017

Backing expansion

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PPL transformed its electricity business over the past year, buying subsidiaries from German giant E.ON and carefully using the debt and equity markets to do so. Stocking up term debt might have been the cheapest option but PPL had its credit rating to think about. Timothy Sifert reports.

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When PPL went to the sterling bond market to take out the remainder of a £3.6bn bridge facility in May this year, company executives expected demand for the two-part financing to be strong. Investors had gotten to know PPL well in the year leading up to its first UK trade.

PPL had recently made two enterprise-defining acquisitions that needed financing. The debt capital markets, generally starved for M&A-backed paper, were more than willing to oblige.

However, developing a suitable financing plan wasn’t so easy. A highly regulated electric utility like PPL has to be more careful than other borrowers in the capital markets. Regulators require them to maintain investment grade ratings. Piling on debt in a haphazard manner, no matter how cheap, was not an option. 

Yet the timing was excellent for an electric utility, which are generally considered safe bets for investors and are therefore appealing defensive plays. On April 28 2010 the Pennsylvania-based company announced its agreement to buy E.ON’s US business, which included Louisville Gas and Electric and Kentucky Utilities. That deal, which eventually closed in November, needed financing and a US$6.5bn bridge loan was put in place.

The borrower swiftly circulated the 364-day bridge loan, along with a US$5bn revolver due 2014. Had the bridge been drawn it would have paid lenders about Libor plus 275bp, and the revolver pays plus 200bp and a 25bp undrawn fee.

Keeping its eye on the benchmark – the high-grade rating – executives and bankers put together a smart, variegated take-out scheme, including common equity, convertibles, first mortgage bonds, senior unsecured corporate debt and US$250m–$750m of cash.

In June 2010 PPL took care of the most difficult part of the deal, selling US$3.625bn of equity and equity-linked securities, the largest ever such sale by a US utility. That left just under US$3bn in short-term bank debt to address. The bond market was amenable. 

“If it needed to be all debt it could have been all debt,” said one senior loan banker told IFR at the time. “There was a mechanism for that in the facility.”

The lower leverage enabled by the equity sale was a key attraction for bond investors. In November, on a day when US$12.8bn in new high-grade bond volume priced, PPL printed the day’s largest trade, a US$2.9bn three-part fundraising.

The bond offering included three separate PPL subsidiaries, which had been a part of E.ON: LG&E and KU Energy completed a US$875m offering of fives and 10s, while Louisville Gas and Electric, a separate entity, issued a US$535m offering of five and 30-year first mortgage bonds. Kentucky Utilities completed an offering of FMBs with maturities of five, 10 and 30 years.

PPL wasn’t finished with acquisitions – or with E.ON. For its next purchase it took the same tack, employing a bridge to equity and bonds. On April 1 2011 PPL, through a UK subsidiary, completed the purchase of UK electricity distributor Central Networks (now called Western Power) from E.ON, transforming PPL into the largest UK electric distribution operator.

It put in place a £3.6bn bridge to fund the deal, and immediately started to chip away at the debt. On April 11, after the acquisition was closed, PPL raised another US$2.87bn in the form of straight equity and convertibles.

On April 18 this year PPL tapped in the US dollar bond market. Through subsidiary PPL WEM Holdings, PPL Corp priced a US$960m offering of fives and 10s. Investors liked the PPL expansion story and the deal ended up oversubscribed.

In May, looking to diversify its debt profile, PPL found demand in the under-served sterling corporate market and printed a £600m 12-year bond and a £800m 21-year tranche. The £1.4bn fundraising completed the bridge take-out and spread borrower’s maturities safely throughout the curve.

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