Building on fundamentals
With more than €11bn of debt, much of it rapidly approaching maturity, and in a sector that is frighteningly exposed to the economic downturn, things looked pretty desperate at first glance for HeidelbergCement. But the group’s global presence and strong relationships saw it through in its hour of need, allowing it to complete an impressive, self arranged refinancing. Ouida Taaffe reports.
HeidelbergCement, the German-based construction materials group, came to the market to refinance in early 2009. A global company with an established bank group, this was not, on the face of it, an extraordinary move. However, when the credit markets froze in 2008, even leaders in anti-cyclical sectors found it hard to access sufficient liquidity. Many, such as Spanish telecom operator Telefonica, considered it prudent to arrange forward-start facilities. What hope, then, for companies in businesses such as construction, whose markets had taken a pounding? And what if those companies needed to refinance large outstanding loans?
HeidelbergCement’s request certainly did not look like a particularly easy call when it first approached its banks. At the end of 2008, HeidelbergCement had net debt of €11.6bn, of which around €8bn would fall due by the end of 2010. That was a rather uncomfortable situation for a company keen to keep its credit rating intact, and in a market where the ratings agencies were highly conscious of – and vocal on – the market lack of liquidity. At that point, HeidelbergCement was ratedrated B– (on CreditWatch with negative implications) by S&P; B1 (on review for further downgrade) by Moody’s and B (rating watch negative) by Fitch.
Even in a strong market, HeidelbergCement would have been looking to do a deal outside the norm in terms of size and sector. The facilities that it took out at the top of the credit boom in 2007 – a £8.75bn term loan and a €3.4bn to back its acquisition of Hanson, a UK-based building materials maker – were large even by the standards of the time. When the impact of a severe housing bust and a global recession on the world’s construction markets are ftaken into account, HeidelbergCement looked ill-equiped to convince lenders to further extend its lines. There were suggestions that the best that many companies could hope for in that environment was a forward-start instead of a full-blown refinancing.
In the first instance, the company wanted to extend the maturity of a €5.33bn facility, part of an acquisition funding that it had used to buy Hanson in 2007. This line – originally in Sterling – had been redenominated in euros. In early 2009 that loan was said to comprise a €600m tranche maturing in 2009 and a €5bn tranche due in 2010. Deutsche Bank, Commerzbank, Nordea and RBS were mandated on the refinancing. Deutsche Bank and RBS had led the original acquistion deal.
Given that so much was falling due within a relatively short period of time, the request did have a whiff of immediate need about it. HeidelbergCement pointed out that, onerous though its debts were, it was not in breach of any loan covenants. Given that many loans made during the boom were free of such inconveniences, a cynic could argue there may not have been that many covenants to break. But the fact remained HeidelbergCement’s actual position was better positioned that a cursory glance might have suggested.
Its international activities were holding up: while the recession hit hard in Europe and North America, and demand there continued to be sluggish, emerging countries in Australasia and Africa returned to growth more quickly. China, for example, saw major infrastructure projects that were fired on by government stimulus.
The question for HeidelbergCement was not the viability of its business but whether enough of its relationship banks would stand by it. In the spring of 2009 the markets looked tough and many banks had retreated to serving core domestic clients, and prefererably A-rated borrowers. One very significant hurdle was pricing. At that point, even BB rated companies in Europe could expect to pay more than 5% on the margin. Access to bank debt in the US was harder still. Level 3, the B– rated, US-based wholesale telecoms operator, went out offering a margin of 850bp–900bp over Libor for a US$200m add-on.
HeidelbergCement went to the market with a margin of 420bp, which was entirely at variance with pricing based on ratings alone. Even in the European market where banks take a much more relationship-based approach to lending than in the US, the numbers, at that time, seemed tight. However, the deal was accepted and the faith of the banks proved well placed.
HeidelbergCement this year completed a €3bn self-arranged refinancing that replaced the remainder of its €8.7bn 2009 facility. The new facility pays an out of the box margin of 300bp, down from 425bp, and matures at the end of December 2013.