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Monday, 20 November 2017

EMEA High-Yield Bond

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Auto trade: If there was one deal that stood out this year, and appealed to the broadest array of investors, it was German auto parts supplier Schaeffler’s. For ticking all the boxes that represent a truly global deal, Schaeffler’s €2bn-equivalent four-part trade is IFR’s EMEA High-Yield Bond of the Year.

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

When Schaeffler’s fully underwritten €8bn-equivalent refinancing, split between bonds, leveraged institutional loans and bank debt, was first announced in late January, it drew a very mixed response from investors. But by the time the deal had priced it was hailed as one of the standout transactions of the year.

The timing of the deal by lead managers Deutsche Bank, JP Morgan, BNP Paribas and HSBC was critical to its success as it followed a period of strong momentum in the US market in particular and a more constructive backdrop in Europe.

The complex transaction was launched following a global marketing effort, with a six-day pre-deal roadshow followed almost immediately by a three-day roadshow after launch.

The bond, rated B1/B, was initially expected to be €1bn, but strong demand enabled the leads to double the size and to fully refinance an outstanding bond bridge in one swoop and prior to funding.

“Bigger isn’t always better, but in this case a deal of this size was possible because of the demand,” said Jeff Bennett, head of high-yield origination at HSBC.

“That’s even more impressive when you think that this is in a cyclical sector, where the outlook was very uncertain at the time. The company is now on a much sounder financial footing.”

The high-yield transaction established Schaeffler as the largest inaugural dual currency high-yield bond issuer since the onset of the financial crisis. Final books, that were almost 10 times subscribed from over 500 accounts, showed the strength of investor confidence.

The transaction consisted of four tranches. The five-year €800m and US$600m non-call life senior secured bonds maturing in February 2017 were priced to yield 8% – the tight end of price talk of 8%–8.25%. The seven-year €400m and US$500m bonds, maturing in February 2019 and callable after four years, priced at par with respective yields of 8.75% and 8.5%, which were also at the tight end of initial ranges of 8.75%–9% for the euro tranche and 8.5%–8.75% for the dollar piece. 

“The deal is truly global, tapping all four leveraged markets with dollars, euros, bonds and loans,” said one investor.

The initial hesitation from investors stemmed from the company’s chequered past in relation to its badly timed and debt-fuelled acquisition of Continental just as Lehman Brothers filed for bankruptcy in 2008.

It meant that Schaeffler paid over the odds, and left the four original underwriters – a different group of banks to those that led the refinancing – sitting on the debt until this year.

One selling point for investors was the inclusion of a “one vote per euro enforcement” construct that means bondholders are truly pari passu with bank lenders and was regarded widely as a groundbreaking change to documentation.

To top it off the bond was upgraded to Ba3/B+ as a result of the successful refinancing, and it traded well, with all four tranches in a cash-price range of 108 to 111 by end-November, even though the company has not been immune from weaker economic growth.

The success of the deal paved the way for a smaller €300m senior secured retail deal in July, which was upsized from €200m and included a €26m tranche made available to employees. In September, Schaeffler sold a stake in Continental, reducing its holding to 49.9% and lopping off a chunk of its debt in the process.

“Schaeffler really has the whole package. It was a big jumbo size, had a retail deal that followed, and the company sold down its stake in Continental later in the year,” said another investor.

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