Wednesday, 19 December 2018

Spotless performance

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  • Spotless performance
  • Henkel

Henkel may be best known as the owner of Persil washing powder, but it will forever go down in history in the capital markets as one of the only European corporates that investors were willing to pay for the privilege of lending it money.

Dusseldorf-based Henkel is a multinational chemical and consumer goods company employing over 50,000 people around the world - 80% of whom work outside of the German borders. That makes the Dax-30 company one of country’s most international.

The company is split into three divisions: adhesive technologies; beauty care; and laundry and home care, which it sells across consumer, professional and industrial markets. In 2016, those three businesses contributed 48%, 20% and 31% of total company sales, respectively. Those company sales exceeded €5bn for the first time in the first quarter of 2017.

In recent years Henkel, founded in 1876, has been pursuing an ambitious long-term strategy “to be a global leader and on brands and technologies”, kick-started in 2008 by its then CEO, Kasper Rorsted.

The strategy consisted of actively managing its portfolio of brands and businesses, focusing investment on its core brands in order to generate over half its group sales from its top 10 brands, growing profitability and position in mature markets, accelerating growth in emerging markets and targeting operational efficiency through investment in shared services and staff development.

The strategy has paid dividends. By the end of fiscal year 2015, annual sales were reported at €18.09bn (up 10.1% over the year), while operating profit came in at €2.923bn (12.9% higher) and the share price had risen from a low of €18.6 recorded in March 2009 to €109.35 in July 2015. Dividends per share were also up, by over 12%.

It was not all plain sailing heading through 2016, however. News that Rorsted, the man who had presided over a significant increase in sales and profits and a market capitalisation that had more than tripled during his leadership, was leaving the firm led to some concerns.

Any negativity associated with the management change was soon forgotten once Hans Van Buylen, previously responsible for the beauty care business, took the reins and re-enforced the growth strategy.

In 2016, the company made numerous acquisitions around the world, but in June it announced the game-changing purchase of laundry group Sun Products in the US from Vestar Capital Partners for €3.2bn. The deal lifted Henkel up to the number two position in the North American laundry care market. It also significantly changed its debt profile as it turned to the capital markets to pay for the transaction.

From a position in 2015 where commercial paper represented the vast majority of its €884m interest-bearing debt, by the first quarter of 2017, total debt had risen €4.721bn, with bonds representing over half the total and loans just under a quarter.

Capital markets styling

In July, A2/A rated Henkel completed syndication of a US$3.6bn dual-currency loan consisting of a US$2.5bn one-year bridge and a US$1.1bn three-year term loan.

The loan was fully underwritten by Deutsche Bank, JP Morgan and BNP Paribas, with a group of its existing relationship banks (Banco Santander, Bank of America Merrill Lynch, Citigroup, HSBC, RBS, Societe Generale, Standard Chartered and UniCredit) joining the financing.

That closing may have been impressive enough but for the subsequent rapid take-out of the bridge in the bond markets.

Conditions were ripe for a European corporate to make an assault on the bond markets in the autumn of 2016. Earlier in the year, the European Central Bank had dropped the deposit rate to -40bp and had also included euro-denominated issuance from investment-grade corporates in its expanded quantitative easing efforts.

There was a new major investor in the market and spreads of bonds, both in primary and secondary, narrowed significantly as a result. It led to yields in the corporate bond world following those on most European sovereign debt into negative territory.

So, by early September, as Henkel was lined up to tap the public bond markets for the first time since 2009, around 25% of all outstanding eligible euro corporate debt was trading below a yield of 0%.

The €2.2bn-equivalent deal came in multi-currency format, with tranches in sterling over six years and US dollars over three, as well as euros over two and five years. But it was one of the two euro-denominated deals that made the headlines.

At the time, it was fairly logical to think that a 0% return would have represented the limit to where investors would be willing to participate in a new issue. But, as interest in the bonds continued to build coming up to launch, bankers and borrower had to make a decision. Should they push pricing any further into negative returns? They decided to go ahead on the two-year.

The rating, the rarity, the household name and the relative value against deeply negative yields in cash and government bonds justified the decision. For many investors in the money markets, the question must have boiled down to: what’s the alternative? The deal priced to yield -0.05%, or 18.9bp over mid-swaps.

Pushing the deal through a yield of 0% was not welcomed universally, with nearly 20% of pre-launch orders dropping out of the book and some concerns that the deal could be seen as an ego-driven transaction.

Whatever the motivation, however, the deal was certainly a function of the market; a set of circumstances that may never be seen again. The ECB is toning down its asset purchases and the markets are pricing in higher interest rates.

Henkel’s deal, along with a Sanofi transaction that also went negative on the same day, may go down in history as impressive anomalies in the euro bond markets.

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