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Saturday, 18 November 2017

Corporate Issuer

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  • Glass overflowing

Glass overflowing: Issuing €6bn in bonds is no small beer. And Heineken managed to do it while smashing low-coupon records – in the process pulling off one of the most high-profile acquisitions of 2012. Oh, and it got its first ever credit ratings, too. The Dutch breweries company is IFR’s Corporate Issuer of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

With a bevy of leading global brands in its stable – including crowd-pleasers such as Amstel, Foster’s, Dos Equis and Strongbow – Heineken is one of the most recognised brewers in the world. And it expanded that roster in 2012 by acquiring the maker of Tiger Beer, one of the most popular brews in Asia. 

But the 150-year-old company has never had a credit rating until March of this year.

“Heineken was previously able to access the credit markets without a rating, as its long history and name recognition in Europe gave it a technical boost,” said Richard Woolnough, fund manager at M&G.

Once it was finally rated in March, though – an investment-grade Baa1/BBB+ from Moody’s and S&P – the brewing giant hit the bond markets in earnest, raising the equivalent of €6bn in four issues.

Just days after the ratings Heineken carried out a deal that bankers called a “strategic door opener” – a €1.35bn transaction of seven and 12-year notes. The deal attracted an impressive €12bn order book.

The 12-year, which priced at mid-swaps plus 115bp with a 3.5% coupon, was the longest euro deal ever from a Triple B issuer.

Perhaps most important of all, the trade paved the way for Heineken to make its debut in the US dollar bond market little more than a fortnight afterwards – a market that would prove to be a critical avenue of funding later in the year.

The March debut, an upsized US$750m 10-year 144a offering, tightened approximately 12bp when it priced at 127bp over Treasuries. The reoffer level represented a 25bp discount to where the euro notes were trading at the time.

Meanwhile, those euro notes had tightened by 14bp and 32bp. The Heineken name, always seen as solid, was gaining momentum in the markets.

While syndicate bankers and strategists have struggled to put an exact value on it, there is wide agreement that Heineken easily offset the cost of getting rated, considering the magnitude of its funding operations this year.

Getting rated “increases the number of investors who will buy [a] deal”, said Woolnough, “from unsophisticated index funds who buy anything in indices to other investors who are rating-constrained or unable to do credit analytical work themselves”.

Taking Tiger by the tail

The company’s most significant trades of the year were still to come. In July, Heineken launched a bid for Asia Pacific Breweries, maker of Tiger Beer, an iconic Asian brand. While steady growth and strong forecasts for beer sales in emerging markets made APB seem an attractive target, the company’s ownership structure made it one of the most complicated assets that Heineken could have taken on.

Nevertheless, stockholders roared their approval. Heineken shares hit a three-month high after the announcement, and the company wasted no time returning to the debt markets with a €1.75bn dual-tranche eight and 13-year bond to finance the potential APB takeover.

Heineken priced the €1bn and €750m tranches at mid-swaps plus 57bp and plus 92bp, respectively, after building an order book that topped €7bn.

More than two months after the initial bid, Heineken finally secured full control of APB in late September, through a deal that eventually cost the group S$7.9bn (US$6.47bn).

The deal was to be paid for through a combination of €1bn cash, an undrawn revolving credit facility of €2bn, and a new bridge loan to bond issue of €2.5bn from a group of six banks.

Heineken went back to the US dollar market on October 2, when funding conditions could not have been more ideal. The brewer opened books on a hefty US$3.25bn bond offering consisting of four tranches, ranging in maturity from three to 30 years.

Combined orders were a whopping US$23bn, and final pricing was 5bp tighter than guidance. The US$500m three-year printed with a spread of 55bp, priced at 99.827 to yield 0.859%. The 0.8% coupon was the lowest on a three-year tenor ever paid by a Triple B name, and the first to come in under 1%.

The five-year also set a coupon record. The US$1.25bn issue printed with a spread of 85bp, priced at 99.670 to yield 1.469%. The 1.4% coupon was the lowest ever from a Triple B credit, edging out the 1.5% established earlier in the year by HJ Heinz Co.

The US$1bn 10.5-year came with a 115bp spread and a 2.75% coupon, priced at 99.811 to yield 2.771%. Finally, the US$500m 30-year printed at a 130bp spread with a 4% coupon, priced at 98.251 with a 4.102% yield.

The deal was a tremendous success. The day after the transaction, Heineken announced it had been able to cancel the bridge loan – much quickler than bankers had been expecting. The company’s funding costs were historically low.

“The Heineken transactions were significant because it was the first time a 150-year-old company had moved away from a bank financing-oriented focus to a capital markets financing structure, and it was rewarded for that call,” said Peter Aherne, head of capital markets syndicate and new products at Citigroup.

“The issuer clearly made the right decision of completing a critical financing in its history in the US debt capital markets, because the bonds priced through levels achieved in Europe,” he said.

While there was a relative dearth of M&A deals in 2012 – most of the year’s supply was refinancing activity – Heineken’s issuance for the APB deal was nevertheless another example of the US investment-grade market being used to provide the funding for larger-scale acquisitions.

“In regards to the acquisition financing, the company had told investors that they were expecting costs to not exceed 3%,” Aherne said. “The weighted average cost of the trade was 2.12%.”

Getting better all the time

Even so, all four of the bonds tightened after pricing. For many investors, meanwhile, Heineken has cemented its position at top of their lists of low-beta credits. The company’s share price has shot up 37% year to-date. And despite the dark clouds still looming over the European landscape, it reported stronger than expected third-quarter revenue.

There were stronger sales in the Americas as well as in the Asia-Pacific region, where sales were up 4.8%, led by Indonesia, Singapore, Thailand, Vietnam and India.

Many credit strategists believe Heineken has one of the best exposures in the emerging markets sector out of all the global brewers, and that its risk profile is well-adjusted to current market realities.

Investors seem to agree. The cost of protection on the name almost halved in 2012, down to around 73bp on five-year CDS at the time of writing. (In contrast, Carlsberg’s comparable CDS shrunk only 35bp to 105bp over the same period. SABMiller’s dropped around 42bp to 80bp.)

Indeed, Heineken’s runaway success as a rated corporate could encourage more unrated names to make a similar move. For that reason along with many others, it is the standout corporate issuer of the year.

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