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Saturday, 18 November 2017

Sterling Bond: National Grid Gas Finance's £3bn five-tranche bond

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Firing on all cylinders

The Bank of England’s post-referendum stimulus measures brought the sterling market to life, and National Grid Gas Finance quickly pounced on those conditions to sell the biggest corporate bond that the market had ever seen.

Not that it was plain sailing: the transaction came during a huge transition for the parent company. National Grid announced in November 2015 that it intended to sell a majority of shares in its gas distribution business.

“The changing structure of the company was complex and it needed explaining,” said Christopher Lipscomb, managing director at structuring bank and bookrunner Morgan Stanley. “Many investors questioned the risks around buying debt from an entity undergoing so much change.”

But despite the complexity, the company managed to raise £3bn on September 13 with a five-tranche deal ranging across the curve from five to 30 years.

There were other issues that might have put investors off. First, there was an intricate sale plan that affected the credit metrics and future credit ratings of the deal. In addition, although National Grid GF was rated A3/A–/A, all its ratings were on review for downgrade or on negative watch.

But investors, clearly not wanting to be underweight on such an established and well-known credit, nonetheless rushed in to place £6.4bn of orders. The result was extremely punchy pricing.

“It was a fantastic result, the average cost of funding across the sterling tranches was around 2%, way lower than any other sterling bond of a substantial size,” said Lipscomb.

The £3bn total nominal volume eclipsed Enel’s £2.25bn dual-tranche 15 and 31-year outing from late 2009 as the largest sterling issue ever from a corporate issuer.

Sterling sweet spot

National Grid GF attracted further attention by selling the deal the day after the Bank of England said that four of the issuer’s bonds were eligible for its purchase programme.

The central bank intends to buy £10bn of corporate paper, initially through thrice-weekly auctions, which started on September 27. The programme, which encompasses debt from companies that make a material contribution to UK economic activity, will last for 18 months.

The BoE has single-handedly “lifted the sterling market out of irrelevancy”, said one head of corporate debt capital markets.

Bookrunners were Bank of America Merrill Lynch, Barclays, BNP Paribas, HSBC and Morgan Stanley.

National Grid GF also launched a tender offer on nine of its sterling bonds, and raised a further €600m in the weeks after its sterling foray, all of which will be used to lever the company’s gas distribution assets, and de-risk the sale of the stake.

* Syndicate titles corrected in penultimate paragraph. Correction in final paragraph as National Grid completed a tender offer for nine bonds, not a consent solicitation on 10 bonds.

To see the digital version of this review, please click here.

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

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