Wednesday, 12 December 2018

Impeccable long draw

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  • British American Tobacco

BAT’s M&A loan financing provided a test of market awareness - a test it passed with ease 

Amid a wave of populist political movements in the West that sent jitters through capital markets, British American Tobacco picked the perfect moment of calm to announce a US$49bn debt-backed acquisition of the 57.8% stake of Reynolds American it did not already own.

BAT, rated Baa2/BBB+, raised US$25bn of loans in January to fund the purchase from a relatively small syndicate of banks considering the huge amount, in a deal where even the slightest error in calculations had the potential to scupper the process.

“A deal of this size – every detail becomes amplified,” said Greg Brown, a partner at law firm Allen & Overy, which advised the lenders. “If you get the tax analysis even slightly wrong with a deal of this scale, it’s going to have huge costs. The margin for error is nil.”

The loans, which make up the largest of 2017 so far in any currency, were split into four facilities. The largest were a US$15bn one-year bridge loan and a US$5bn two-year bridge loan that pay lenders 40bp and 45bp over Libor, respectively.

Lighting up bonds

The bridge loans will be taken out in the capital markets “in due course”, the borrower said in a statement.

“I’m surprised they haven’t already come,” said one syndicate banker. “The market was so strong in May with jumbo trades coming almost every week. You would have thought they would have taken the opportunity.”

The bond take-out is expected to be in dollars to prevent currency mismatch, though not necessarily, the banker added.

Investors are eager to see what the spread on the bond takeout will be.

“It’s a popular name with a strong cashflow,” said one head of credit at an asset manager. “It’s a chance to buy a decent underlying credit at perhaps the peak of its leverage cycle, and perhaps lock in a bit of spread before it starts to delever.”

BAT also raised two US$2.5bn term loans, one with a maturity of three years that pays 75bp over Libor and the other a five year facility that pays Libor plus 85bp.

The initial mandated lead arrangers and bookrunners on the acquisition facility were Bank of America Merrill Lynch, Citigroup, Deutsche Bank, HSBC and Royal Bank of Scotland.

The loans were then syndicated out to Banco Santander, Bank of China, Bank of Nova Scotia, Barclays, BBVA, Commerzbank, ING, Lloyds, Mizuho, Societe Generale, SMBC and UniCredit as mandated lead arrangers and bookrunners. Standard Chartered joined as lead arranger

“It’s all got to be linked exactly to the M&A process, which we and the people on the lending side do not have control over,” said Brown at A&O. “At the very least it would be very embarrassing for the deal to be hindered by a missed detail, so no one can take a view and everyone quite rightly obsesses about getting it absolutely right.”

Choked by headlines

The acquisition loans were announced in a rare break from the political headlines that dominated the news cycle at the time.

By January, the shock over the UK’s vote to leave the European Union had temporarily simmered down, as had the surprise of Donald Trump’s election to the highest state of office in the US. It was the perfect time to ask banks for a loan of audacious size.

“The timing was absolutely right,” said Brown at A&O. “It came when there were relatively fewer political concerns and the market was able to absorb a deal of this size very quickly.”

There are still some political concerns hanging over the deal, as President Trump has yet to provide full details on the tax reforms he has promised since running for office. This could have a material impact on Reynolds’ tax rate, which may hinder the deal.

But BAT was not done there. The borrower then moved to the sterling market to raise forward-start revolving credit lines to provide liquidity for the bigger company – which would be the largest listed tobacco company by sales after the acquisition.

BAT signed £5.68bn of revolvers split equally between a 364-day facility ‘A’ and a facility ‘B’ due to mature in May 2021, with the facility coming with an accordion feature that could add another £160m to each loan. The majority of banks in the 19-strong lending group committed £160m tickets to the deal.

The borrower will pay between 27.5bp and 50bp over Libor for each facility as long as its Baa2/BBB+ ratings remain where they are. Throughout the process, BAT has repeatedly said it is committed to maintaining its investment-grade ratings.

BAT will pay another 7.5bp for drawing up to a third of the lines, rising to 15bp up for two-thirds and 30bp for drawing more than two-thirds.

BAT-Reynolds is potentially a trailblazer for jumbo M&A activity in the sector, with Japan Tobacco, which has a market capitalisation of US$75.3bn-equivalent, marked as a potential buyer by analysts.

But Japan Tobacco told Reuters in May that anti-trust laws made a jumbo acquisition “non-realistic”.

However, BAT passed through the regulators’ nets. The company announced in May that it had received unconditional approval from Japanese authorities, wrapping up the necessary approvals for closing the deal.

“The BAT-Reynolds deal getting through anti-trust regulations will be a signal to others it can be done,” said the syndicate banker. “So it might open the doors for more.”

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